S E L E C T M E D I C A L H O L D I N G S C O R P O R A T I O N
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8
Our Mission
S E L E C T M E D I C A L W I L L P R O V I D E A N E X C E P T I O N A L
P A T I E N T C A R E E X P E R I E N C E T H A T P R O M O T E S H E A L I N G
A N D R E C O V E R Y I N A C O M P A S S I O N A T E E N V I R O N M E N T.
Partners in Post-Acute Care
L E A R N M O R E A T >> S E L E C T M E D I C A L H O L D I N G S . C O M
A N N U A L R E P O R T
4 7 1 4 G E T T Y S B U R G R O A D , M E C H A N I C S B U R G , P A 1 7 0 5 5
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Q U A L I T Y C A R E M A D E S T R O N G E R
T H R O U G H J O I N T V E N T U R E P A R T N E R S H I P S
AZ
AZ
CA
Banner Health
HonorHealth
UCLA Health & Cedars-Sinai
CA
FL
GA
UC San Diego Health
UF Health
Emory Health
LA
MI
Ochsner Health
Spectrum Health
MO
SSM Health
NV
OH
OH
Dignity Health
Cleveland Clinic
OhioHealth
B O A R D O F D I R E C T O R S
Robert A. Ortenzio
James S. Ely III
Executive Chairman & Co-Founder
Founder & Chief Executive Officer
Leopold Swergold
Managing Member
Select Medical Holdings Corporation
PriCap Advisors, LLC
Anvers Management Company, LLC
Rocco A. Ortenzio
William H. Frist
Vice Chairman & Co-Founder
Former Majority Leader of
Select Medical Holdings Corporation
the United States Senate
Marilyn B. Tavenner
Former Administrator of
Centers for Medicare &
Partner, Cressey & Company
Medicaid Services
Russell L. Carson
Founder
Harold L. Paz, M.D.
Executive Vice President
Welsh, Carson, Anderson & Stowe
& Chief Medical Officer
Bryan C. Cressey
Founder & Partner
Cressey & Company
Aetna Inc.
Thomas A. Scully
General Partner
Welsh, Carson, Anderson & Stowe
E X E C U T I V E O F F I C E R S
Robert A. Ortenzio
Martin F. Jackson
Executive Chairman & Co-Founder
Executive Vice President
& Chief Financial Officer
Scott A. Romberger
Senior Vice President, Controller
& Chief Accounting Officer
Rocco A. Ortenzio
John A. Saich
Robert G. Breighner, Jr.
Vice Chairman & Co-Founder
Executive Vice President
Vice President, Compliance and Audit Services
& Chief Administrative Officer
& Corporate Compliance Officer
David S. Chernow
Michael E. Tarvin
President & Chief Executive Officer
Executive Vice President,
General Counsel & Secretary
C O R P O R A T E I N F O R M A T I O N
Corporate Headquarters
Stockholder Inquiries
Select Medical Holdings Corporation
Joel T. Veit
Register & Stock Transfer Agent
Stockholder correspondence
4714 Gettysburg Road
Senior Vice President & Treasurer
should be mailed to:
Mechanicsburg, PA 17055-5036
4714 Gettysburg Road
717.972.1100
Mechanicsburg, PA 17055-5036
Computershare
P.O. Box 505000
717.972.1100 | ir@selectmedical.com
Louisville, KY 40233-5000
Independent Registered Public
Stock Exchange
Accounting Firm
PricewaterhouseCoopers LLP
Penn National Insurance Plaza
2 N. 2nd Street, Suite 1100
Harrisburg, PA 17101
NYSE
Symbol: SEM
Internet Address
selectmedicalholdings.com
Overnight correspondence
should be mailed to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
critical illness recove ry
rehabilitation hos p ita l s
S E L E C T M E D I C A L
I M P R O V I N G Q U A L I T Y O F L I F E
2 0 1 8 A N N U A L R E P O R T
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OH
PA
PA
TriHealth
Penn State Health
UPMC Pinnacle
TX
VA
Baylor Scott & White
Riverside Health
G R O W T H S P O T L I G H T :
C O N C E N T R A S E G M E N T
In 2018, our Concentra segment grew significantly
through the addition of U.S. HealthWorks. Much of the
year was spent on this large-scale integration, while
simultaneously focusing on executing strategic initiatives
which resulted in: increased visits, decreased patient
turnaround times and enhanced staffing efficiencies.
>>
Concentra is the nation’s largest provider of occupational
health services. This segment’s expanded national
footprint - coupled with its focus on quality care and
patient/client satisfaction - gives us a distinct competitive
advantage and will drive growth opportunities in 2019
and beyond.
Patient Success Story
While being treated for cancer, Melodee experienced numbness in
her right arm, which her oncologist felt was due to chemotherapy-
related neuropathy. As time went on, Melodee lost sensation in
her right hand, was unable to tie her shoes and had to take a daily
medication, which she feared would be long-term. When she fell
at work and injured her left arm, Melodee’s employer sent her to
Concentra. There, Alan, the physician assistant, asked about both
her injured left arm and her numb right arm/hand. He felt her
right arm had been misdiagnosed and was actually cubital tunnel
syndrome. When Melodee started physical therapy for her left arm,
her therapists, Evan and Justin, also provided home exercises for her
right hand, which had an immediate effect. “Two weeks after going
to Concentra, I was able to quit taking medication for my right hand
and could tie my own shoes again,” Melodee said. “If I hadn’t fallen
at work, I may never have regained the use of my right hand.”
outpatient rehabilitation
conc en tra
2 0 1 8 A N N U A L R E P O R T
1
T O O U R S H A R E H O L D E R S
As we look back on 2018, there are many accomplishments to celebrate. There is a dominant theme that
emerges and that is one of partnership.
Throughout the year, Select Medical positioned itself as the nation’s premier partner in post-acute care.
During the past decade, we have successfully partnered with leading organizations to elevate and advance
healthcare across the country. And 2018 was no exception, as we grew existing joint ventures, announced
new partnerships and cultivated future opportunities. By joining together, the strength of two becomes the
power of one … which creates innovative ways to further the delivery of post-acute care.
Early in 2018, Select Medical and Dignity Health announced the completion of a transaction to combine
Concentra and U.S. HealthWorks. Select Medical also entered into a joint venture with Banner Health to
operate rehabilitation hospitals and outpatient rehabilitation clinics in Arizona. In May, we celebrated the
opening of a new rehabilitation hospital through our partnership with Ochsner Health System in Louisiana.
During the summer, we expanded our joint venture with Baylor Scott & White Health when the doors of
a fourth rehabilitation hospital opened and we added outpatient rehabilitation clinics in Austin, Texas. In
October, we announced plans for our first critical illness recovery hospital in California through a partner-
ship with UC San Diego Health.
In keeping with our values, we focused on delivering superior quality in all that we do across the organization.
Within our rehabilitation hospital segment, Kessler Institute for Rehabilitation was honored for the 26th
consecutive year by U.S. News & World Report as one of the nation’s best rehabilitation hospitals. Mean-
while, our critical illness recovery hospital segment participated in the Mid-Atlantic Alliance for Performance
Excellence Program, a Malcolm Baldrige-based program. We received the Mastery Award and embraced this
opportunity to celebrate what we do well, while identifying ways to further innovate and excel.
We were once again pleased that our commitment to growing our Company resulted in another year of
strong financial performance. Net operating revenues grew 16.4% year-over-year to more than $5.0 billion
and operating income grew 17.3% year-over-year to $417.3 million. In 2018, we generated more than $494
million in cash flows from operations during the year, which allowed us to pay down close to $200 million
of Select’s outstanding debt balance during the year.
Our operating segments continued to evolve and expand their focus in 2018, which include the following
highlights:
In 2018, we undertook a rebranding initiative for our long-term acute care (LTAC) hospital segment by
revealing a new name: critical illness recovery hospitals. It better defines our purpose, is more easily under-
stood by key stakeholders, and quickly conveys how we help high-acuity and medically complex patients
heal and recover.
In October, our rehabilitation hospitals and critical illness recovery hospitals partnered together to host the
2018 National Summit on Post-Acute Care Safety and Quality in Washington, D.C. This prestigious event
is now in its sixth year.
Within the outpatient rehabilitation segment, we continued to focus on concussion management and
non-pharmaceutical pain management. Our clinics educated their respective communities on “direct
access” and how individuals can seek physical rehabilitation care without a prescription.
2
S E L E C T M E D I C A L
I M P R O V I N G Q U A L I T Y O F L I F E
Our innovative ReVital Cancer Rehabilitation program more than doubled in size – growing from four regional
markets (at the end of 2017) to 10 (by the end of 2018).
Much of the year was spent integrating the Concentra and U.S. HealthWorks organizations.
This combined footprint of 524 occupational medicine centers and 124 employer worksites in 43 states serves
more than 44,000 patients each day.
The ONE Select Commitment
To maintain Select Medical’s leadership position in post-acute care, we invest time, effort and energy in our
culture and employee engagement. Our ONE Select philosophy remains at the forefront of our organizational
consciousness, as it unites our operating segments, geographies, brands and workforce.
In 2018, our employees laced up their sneakers as nearly 200 walk teams participated at local Relay For Life
events. Together, we raised more than a quarter million dollars for the American Cancer Society.
In May, nearly 500 colleagues participated in the 2018 Select Medical Way Conference. Held in Cleveland, it
was the largest to date and represented our seventh annual reaffirmation to the Select Medical Way, which
guides our organization’s culture.
When Mother Nature’s wrath struck, we rallied together to ensure our patients and employees were safe at
the hospitals, clinics and centers in the devastating path of two back-to-back hurricanes.
In closing, 2018 was a year in which the company continued to grow and innovate. This was powered by the
collective clinical quality and operational excellence of Select Medical and its partners.
As always, we thank you and appreciate your trust and belief in all that we do.
Sincerely,
Robert A. Ortenzio
Executive Chairman & Co-Founder
Rocco A. Ortenzio
Vice Chairman & Co-Founder
David S. Chernow
President & Chief Executive Officer
2 0 1 8 A N N U A L R E P O R T
3
FINANCIAL HIGHLIGHTS
SELECT MEDICAL HOLD IN G S CO RP O RAT IO N
(In thousands, except per share data)
2018
2017
2016
2015
2014
FOR THE YEARS ENDED
Net operating revenues(1)
Income from operations
Net income attributable to Select Medical
Holdings Corporation
$ 5,081,258 $ 4,365,245 $ 4,217,460 $ 3,742,736 $ 3,065,017
417,279
355,878
299,847
274,790
284,476
137,840
177,184
115,411
130,736
120,627
Earnings per common share, fully diluted
1.02
1.33
0.87
—
—
—
494,194
238,131
346,603
208,415
170,642
0.99
0.10
0.91
0.40
Dividends per share
Cash flow from operations
SEGMENT INFORMATION
Net operating revenues(1)
Critical illness recovery hospital
$ 1,753,584 $ 1,725,022
$ 1,756,961
$ 1,902,776 $ 1,840,179
Rehabilitation hospital
Outpatient rehabilitation
Concentra(2)
Other
707,514
622,469
498,100
444,005
404,720
1,062,487
1,003,830
979,363
810,009
819,397
1,557,673
1,013,224
982,495
585,222
—
700
541
724
721
Total Net Operating Revenues
$ 5,081,258 $ 4,365,245 $ 4,217,460 $ 3,742,736
$ 3,065,017
Adjusted EBITDA(3)
Critical illness recovery hospital
$ 243,015
$ 252,679
$ 224,609
$ 258,223
$ 272,055
Rehabilitation hospital
Outpatient rehabilitation
Concentra(2)
Other
108,927
142,005
251,977
90,041
132,533
157,561
56,902
129,830
143,009
69,400
98,220
48,301
69,732
97,584
(100,769)
(94,822)
(88,543)
(74,979)
(75,499)
Total Adjusted EBITDA
$ 645,155
$ 537,992
$ 465,807
$ 399,165
$ 363,872
BALANCE SHEET SNAPSHOT AT YEAR-END
Cash and cash equivalents
$ 175,178
$ 122,549
$ 99,029
$ 14,435
$ 3,354
Working capital
Total assets
Total debt
Stockholders’ equity
287,338
315,423
191,268
19,869
133,220
5,964,265
5,127,166
4,920,626
4,388,678
2,924,809
3,293,381
2,699,902
2,698,989
2,385,896
1,552,976
803,042
823,368
815,725
859,253
739,515
(1)
(2)
(3)
For the years ended December 31, 2016, 2017, and 2018, net operating revenues reflect the adoption of Topic 606, Revenue from Contracts with Customers. Net operating revenues were
not retrospectively conformed for the years ended December 31, 2014 and 2015.
The selected financial data for the company’s Concentra segment for the periods presented begins as of June 1, 2015, which is the date the Concentra acquisition was consummated.
Adjusted EBITDA is used by Select Medical to report its segment performance. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization,
gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with Concentra, Physiotherapy and U.S. HealthWorks, non-operating gain (loss)
and equity in earnings (losses) of unconsolidated subsidiaries. Refer to Item 6 and Item 7 of Form 10-K for further consideration of Adjusted EBITDA as a Non-GAAP measure.
4
S E L E C T M E D I C A L
I M P R O V I N G Q U A L I T Y O F L I F E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file numbers: 001-34465 and 001-31441
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrants as specified in their Charter)
Delaware
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA
(Address of Principal Executive Offices)
20-1764048
23-2872718
(I.R.S. Employer
Identification Number)
17055
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(717) 972-1100
(Registrants’ telephone number, including area code)
Title of Each Class
Select Medical Holdings Corporation,
Common Stock, $0.001 par value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.
Select Medical Holdings Corporation Yes
No
Select Medical Corporation Yes
No
Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding twelve months (or for such shorter period that the registrants were required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant, Select Medical Holdings Corporation, is a large accelerated filer, an accelerated filer, a non- accelerated filer, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant, Select Medical Corporation, is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of Holdings’ voting stock held by non-affiliates at June 29, 2018 (the last business day of Holdings’ most recently completed second fiscal quarter) was
approximately $1,963,731,627, based on the closing price per share of common stock on that date of $18.15 as reported on the New York Stock Exchange. Shares of common stock known by the
registrants to be beneficially owned by directors and officers of Holdings subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934 are not included in
the computation. The registrants, however, have made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.
The number of shares of Holdings’ Common Stock, $0.001 par value, outstanding as of February 1, 2019 was 135,262,167.
This Form 10-K is a combined annual report being filed separately by two registrants: Select Medical Holdings Corporation and Select Medical Corporation. Unless the context
indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned
operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra Inc., the indirect operating subsidiary of Concentra Group Holdings Parent, LLC
(“Concentra Group Holdings Parent”), and its subsidiaries. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and Concentra Group Holdings Parent and
its subsidiaries.
Documents Incorporated by Reference
Listed hereunder are the documents, any portions of which are incorporated by reference and the Parts of this Form 10-K into which such portions are incorporated:
1.
The registrant's definitive proxy statement for use in connection with the 2019 Annual Meeting of Stockholders to be held on or about April 30, 2019 to be filed within 120 days after
the registrant’s fiscal year ended December 31, 2018, portions of which are incorporated by reference into Part III of this Form 10-K. Such definitive proxy statement, except for the parts therein
which have been specifically incorporated by reference, should not be deemed “filed” for the purposes of this form 10-K.
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
Item
Forward-Looking Statements
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART I
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Selected Financial Data.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
PART III
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Certain Relationships, Related Transactions and Director Independence.
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules.
Form 10-K Summary.
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Signatures
Page
1
3
28
39
40
41
43
44
47
50
76
76
76
77
78
79
79
79
80
80
81
86
87
PART I
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Statements
that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking
statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,”
“anticipate,” “plan,” “target,” “estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements
regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our
strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing
plans, budgets, working capital needs, and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our
management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to
the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive
conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known
and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking
statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
changes in government reimbursement for our services and/or new payment policies may result in a reduction in net
operating revenues, an increase in costs, and a reduction in profitability;
the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare
certifications may cause our net operating revenues and profitability to decline;
the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as “hospitals
within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and
profitability to decline;
a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational
harm and increased costs;
acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen
liabilities;
our plans and expectations related to our acquisitions, including the acquisition of U.S. HealthWorks by Concentra, and our
ability to realize anticipated synergies;
private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and
profitability;
the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating
revenues and profitability;
shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs
significantly or limit our ability to staff our facilities;
competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;
the loss of key members of our management team could significantly disrupt our operations;
the effect of claims asserted against us could subject us to substantial uninsured liabilities;
a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and
reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the
Health Information Technology for Economic and Clinical Health Act; and
other factors discussed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), including
factors discussed under the heading “Risk Factors” of this annual report on Form 10-K.
1
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC,
we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information,
future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the
expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy
to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly,
stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of
the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such
reports are not the responsibility of the Company.
2
Item 1. Business.
Overview
We began operations in 1997 and, based on the number of facilities, are one of the largest operators of critical illness recovery
hospitals (previously referred to as long term acute care hospitals), rehabilitation hospitals (previously referred to as inpatient
rehabilitation facilities), outpatient rehabilitation clinics, and occupational health centers in the United States. As of December 31,
2018, we had operations in 47 states and the District of Columbia. As of December 31, 2018, we operated 96 critical illness
recovery hospitals in 27 states, 26 rehabilitation hospitals in 11 states, and 1,662 outpatient rehabilitation clinics in 37 states and
the District of Columbia. As of December 31, 2018, Concentra, a joint venture subsidiary, operated 524 occupational health centers
in 41 states. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-
based outpatient clinics (“CBOCs”).
We manage our Company through four business segments: our critical illness recovery hospital segment, our rehabilitation
hospital segment, our outpatient rehabilitation segment, and our Concentra segment. We had net operating revenues of $5,081.3
million for the year ended December 31, 2018. Of this total, we earned approximately 34% of our net operating revenues from
our critical illness recovery hospital segment, approximately 14% from our rehabilitation hospital segment, approximately 21%
from our outpatient rehabilitation segment, and approximately 31% from our Concentra segment. Our critical illness recovery
hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex
medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical
rehabilitation care. Patients are typically admitted to our critical illness recovery hospitals and rehabilitation hospitals from general
acute care hospitals. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech
rehabilitation services. Our Concentra segment consists of occupational health centers and contract services provided at employer
worksites that deliver occupational medicine, physical therapy, and consumer health services. Additionally, our Concentra segment
delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Results of Operations” and “Notes to Consolidated Financial Statements—Note
11. Segment Information” beginning on F-35 for financial information for each of our segments for the past three fiscal years,
which have been recast to reflect the current reportable segment structure of our Company.
Critical Illness Recovery Hospitals
We are a leading operator of critical illness recovery hospitals in the United States, which are certified by Medicare as long
term care hospitals (“LTCHs”). As of December 31, 2018, we operated 96 critical illness recovery hospitals in 27 states. For the
years ended December 31, 2016, 2017, and 2018, approximately 53%, 52% and 51%, respectively, of the net operating revenues
of our critical illness recovery hospital segment came from Medicare reimbursement. This percentage declined in 2018 as compared
to the prior year because of the changes we implemented at critical illness recovery hospitals operating under Medicare patient
criteria as LTCHs, which have resulted in lower Medicare patient volume. As of December 31, 2018, we employed approximately
13,500 people in our critical illness recovery hospital segment, consisting primarily of registered nurses, respiratory therapists,
physical therapists, occupational therapists, and speech therapists.
We operate the majority of our critical illness recovery hospitals as a hospital within a hospital (an “HIH”). A critical illness
recovery hospital that operates as an HIH leases space from a general acute care hospital, or “host hospital,” and operates as a
separately licensed hospital within the host hospital, or on the same campus as the host hospital. In contrast, a free-standing critical
illness recovery hospital does not operate on a host hospital campus. We owned 96 critical illness recovery hospitals at December 31,
2018, of which 71 were operated as HIHs and 25 were operated as free-standing hospitals.
Patients are typically admitted to our critical illness recovery hospitals from general acute care hospitals, likely following
an intensive care unit stay, suffering from chronic critical illness. These patients have highly specialized needs, with serious and
complex medical conditions involving multiple organ systems. These conditions are often a result of complications related to heart
failure, complex infectious disease, respiratory failure and pulmonary disease, complex surgery requiring prolonged recovery,
renal disease, neurological events, and trauma. Given their complex medical needs, these patients require a longer length of stay
than patients in a general acute care hospital and benefit from being treated in a critical illness recovery hospital that is designed
to meet their unique medical needs. For the year ended December 31, 2018, the average length of stay for patients in our critical
illness recovery hospitals was 28 days.
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Additionally, we continually seek to increase our admissions by demonstrating our quality outcomes and, by doing so,
expanding and improving our relationships with the physicians and general acute care hospitals in the markets where we operate.
We maintain a strong focus on the provision of high-quality medical care within our facilities. The Joint Commission (“TJC”) and
DNV GL Healthcare USA, Inc. (“DNV”) are independent, not-for-profit organizations that establish standards related to the
operation and management of healthcare facilities. As of December 31, 2018, we operated 96 critical illness recovery hospitals,
95 of which were accredited by TJC. One of our critical illness recovery hospitals was accredited by DNV. Also as of December 31,
2018, all of our critical illness recovery hospitals were certified as LTCHs. Each of our critical illness recovery hospitals must
regularly demonstrate to a survey team conformance to the applicable standards established by TJC, DNV or the Medicare program,
as applicable.
When a patient is referred to one of our critical illness recovery hospitals by a physician, case manager, discharge planner,
or payor, a clinical assessment is performed to determine patient eligibility for admission. Based on the determinations reached
in this clinical assessment, an admission decision is made.
Upon admission, an interdisciplinary team meets to perform a comprehensive review of the patient’s condition. The
interdisciplinary team is composed of a number of clinicians and may include any or all of the following: an attending physician;
a registered nurse; a physical, occupational, and speech therapist; a respiratory therapist; a dietitian; a pharmacist; and a case
manager. Upon completion of an initial evaluation by each member of the treatment team, an individualized treatment plan is
established and immediately initiated. Case management coordinates all aspects of the patient’s hospital stay and serves as a
liaison to the insurance carrier’s case management staff as appropriate. The case manager specifically communicates clinical
progress, resource utilization, and treatment goals to the patient, the treatment team, and the payor.
Each of our critical illness recovery hospitals has a distinct medical staff that is composed of physicians from multiple
specialties that have successfully completed the required privileging and credentialing process. In general, physicians on the
medical staff are not directly employed but are more commonly independent, practicing at multiple hospitals in the community.
Attending physicians conduct daily rounds on their patients while consulting physicians provide consulting services based on
the specific medical needs of our patients. Each critical illness recovery hospital develops on-call arrangements with individual
physicians to ensure that a physician is available to care for our patients. When determining the appropriate composition of the
medical staff of a critical illness recovery hospital, we consider the size of the critical illness recovery hospital, services provided
by the critical illness recovery hospital, if applicable, the size and capabilities of the medical staff of the general acute care
hospital that hosts that HIH and, if applicable, the proximity of an acute care hospital to the free-standing critical illness recovery
hospital. The medical staff of each of our critical illness recovery hospitals meets the applicable requirements set forth by
Medicare, the hospital’s applicable accrediting organizations, and the state in which that critical illness recovery hospital is
located.
Our critical illness recovery hospital segment is led by a president & chief operating officer, chief medical officer, and
chief quality officer. Each of our critical illness recovery hospitals has an onsite management team consisting of a chief executive
officer, a medical director, a chief nursing officer, and a director of business development. These teams manage local strategy
and day-to-day operations, including oversight of clinical care and treatment. They also assume primary responsibility for
developing relationships with the general acute care providers and clinicians in the local areas we serve that refer patients to
our critical illness recovery hospitals. We provide our critical illness recovery hospitals with centralized accounting, treasury,
payroll, legal, operational support, human resources, compliance, management information systems, and billing and collection
services. The centralization of these services improves efficiency and permits staff at our critical illness recovery hospitals to
focus their time on patient care.
For a description of government regulations and Medicare payments made to our critical illness recovery hospitals, see “—
Government Regulations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Regulatory Changes.”
Critical Illness Recovery Hospital Strategy
The key elements of our critical illness recovery hospital strategy are to:
Focus on Specialized Inpatient Services. We serve highly acute patients and patients with debilitating injuries and
rehabilitation needs that cannot be adequately cared for in a less medically intensive environment, such as a skilled nursing
facility. Chronically critically ill patients admitted to our critical illness recovery hospitals require long stays, benefiting from
a more specialized and targeted clinical approach. Our care model is distinct from what patients experience in general acute
care hospitals.
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Provide High-Quality Care and Service. Our critical illness recovery hospitals serve a critical role in comprehensive
healthcare delivery. Through our specialized treatment programs and staffing models, we treat patients with acute, highly
complex, and specialized medical needs. Our treatment programs focus on specific patient needs and medical conditions, such
as ventilator weaning protocols, comprehensive wound care assessments and treatment protocols, medication review and
antibiotic stewardship, infection control prevention, and customized mobility, speech, and swallow programs. Our staffing
models ensure that patients have the appropriate clinical resources over the course of their stay. We maintain quality assurance
programs to support and monitor quality of care standards and to meet regulatory requirements and maintain Medicare
certifications. We believe that we are recognized for providing quality care and service, which helps develop brand loyalty in
the local areas we serve.
Our treatment programs are continuously reassessed and updated based on peer-reviewed literature. This approach
provides our clinicians access to the best practices and protocols that we have found to be effective in treating various conditions
in this population such as respiratory failure, non-healing wounds, brain injury, renal dysfunction, and complex infectious
diseases. In addition, we customize these programs to provide a treatment plan tailored to meet our patients’ unique needs. The
collaborative team-based approach coupled with the intense focus on patient safety and quality affords these highly complex
patients the best opportunity to recover from catastrophic illness. This comprehensive care model is ultimately measured by
the functional recovery of each of our patients.
The quality of the patient care we provide is continually monitored using several measures, including clinical outcomes
data and analyses and patient satisfaction surveys. Quality metrics from our critical illness recovery hospitals are used to create
monthly, quarterly, and annual reporting for our leadership team. In order to benchmark ourselves against other hospitals, we
collect our clinical and patient satisfaction information and compare it to national standards and the results of other healthcare
organizations. We are required to report quality measures to individual states based on unique requirements and laws. We also
submit required quality data elements to the Center for Medicare & Medicaid Services (“CMS”). See “—Government
Regulations—Other Medicare Regulations—Medicare Quality Reporting.”
Control Operating Costs. We continually seek to improve operating efficiency and control costs at our critical illness
recovery hospitals by standardizing operations and centralizing key administrative functions. These initiatives include:
•
•
•
centralizing administrative functions such as accounting, finance, treasury, payroll, legal, operational support, human
resources, compliance, and billing and collection;
standardizing management information systems to assist in capturing the medical record, accounting, billing,
collections, and data capture and analysis; and
centralizing sourcing and contracting to receive discounted prices for pharmaceuticals, medical supplies, and
other commodities used in our operations.
Increase Commercial Volume. We have focused on continued expansion of our relationships with commercial insurers to
increase our volume of patients with commercial insurance in our critical illness recovery hospitals. We believe that commercial
payors seek to contract with our hospitals because we offer our patients high-quality, cost-effective care at more attractive rates
than general acute care hospitals. We also offer commercial enrollees customized treatment programs not typically offered in
general acute care hospitals.
Pursue Opportunistic Acquisitions. We may grow our network of critical illness recovery hospitals through opportunistic
acquisitions. When we acquire a critical illness recovery hospital or a group of related facilities, a team of our professionals is
responsible for formulating and executing an integration plan. We seek to improve financial performance at such facilities by
adding clinical programs that attract commercial payors, centralizing administrative functions, and implementing our standardized
resource management programs.
Rehabilitation Hospitals
Our rehabilitation hospitals provide comprehensive physical medicine, as well as rehabilitation programs and services, which
serve to optimize patient health, function, and quality of life in the United States. As of December 31, 2018, we operated 26
rehabilitation hospitals in 11 states. For the years ended December 31, 2016, 2017, and 2018, approximately 38%, 42% and 42%,
respectively, of the net operating revenues of our rehabilitation hospital segment came from Medicare reimbursement. As of
December 31, 2018, we employed approximately 10,100 people in our rehabilitation hospital segment, consisting primarily of
registered nurses, respiratory therapists, physical therapists, occupational therapists, speech therapists, neuropsychologists, and
other psychologists.
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Patients at our rehabilitation hospitals have specialized needs, with serious and often complex medical conditions requiring
rehabilitative healthcare services in an inpatient setting. These conditions require targeted therapy and rehabilitation treatment,
including comprehensive rehabilitative services for brain and spinal cord injuries, strokes, amputations, neurological disorders,
orthopedic conditions, pediatric congenital or acquired disabilities, and cancer. Given their complex medical needs and gradual
and prolonged recovery, these patients generally require a longer length of stay than patients in a general acute care hospital. For
the year ended December 31, 2018, the average length of stay for patients in our rehabilitation hospitals was 14 days.
Additionally, we continually seek to increase our admissions by demonstrating our quality outcomes and, by doing so,
expanding and improving our relationships with the physicians and general acute care hospitals in the markets where we operate.
We maintain a strong focus on the provision of high-quality medical care within our facilities. As of December 31, 2018, we
operated 26 rehabilitation hospitals, 25 of which were accredited by TJC. One of our rehabilitation hospitals was accredited by
DNV. Also as of December 31, 2018, all of our rehabilitation hospitals were certified as Medicare providers as inpatient
rehabilitation facilities (“IRFs”). 12 of our rehabilitation hospitals also received accreditation from the Commission on
Accreditation of Rehabilitation Facilities (“CARF”), an independent, not-for-profit organization that establishes standards related
to the operation of medical rehabilitation facilities. Each of our rehabilitation hospitals must regularly demonstrate to a survey
team conformance to the applicable standards established by TJC, DNV, the Medicare program, or CARF, as applicable.
When a patient is referred to one of our rehabilitation hospitals by a physician, case manager, discharge planner, health
maintenance organization, or insurance company, we perform a clinical assessment of the patient to determine if the patient meets
criteria for admission. Based on the determinations reached in this clinical assessment, an admission decision is made.
Upon admission, an interdisciplinary team reviews a new patient’s condition. The interdisciplinary team is composed of a
number of clinicians and may include any or all of the following: an attending physician; a registered nurse; a physical, occupational,
and speech therapist; a respiratory therapist; a dietitian; a pharmacist; and a case manager. Upon completion of an initial evaluation
by each member of the treatment team, an individualized treatment plan is established and implemented. The case manager
coordinates all aspects of the patient’s hospital stay and serves as a liaison with the insurance carrier’s case management staff
when appropriate. The case manager communicates progress, resource utilization, and treatment goals between the patient, the
treatment team, and the payor.
Each of our rehabilitation hospitals has a multi-specialty medical staff that is composed of physicians who have completed
the privileging and credentialing process required by that rehabilitation hospital and have been approved by the governing board
of that rehabilitation hospital. Physicians on the medical staff of our rehabilitation hospitals are generally not directly employed
by our rehabilitation hospitals, but instead have staff privileges at one or more hospitals. At each of our rehabilitation hospitals,
attending physicians conduct rounds on their patients on a regular basis and consulting physicians provide consulting services
based on the medical needs of our patients. Our rehabilitation hospitals also have on-call arrangements with physicians to ensure
that a physician is available to care for our patients. We staff our rehabilitation hospitals with the number of physicians, therapists,
and other medical practitioners that we believe is appropriate to address the varying needs of our patients. When determining the
appropriate composition of the medical staff of a rehabilitation hospital, we consider the size of the rehabilitation hospital, services
provided by the rehabilitation hospital, and, if applicable, the proximity of an acute care hospital to the free-standing rehabilitation
hospital. The medical staff of each of our rehabilitation hospitals meets the applicable requirements set forth by Medicare, the
facility’s applicable accrediting organizations, and the state in which that rehabilitation hospital is located.
Our rehabilitation hospital segment is led by a president, chief operating officer, national medical director, chief academic
officer, and chief quality officer. Each of our rehabilitation hospitals has an onsite management team consisting of a chief executive
officer, a medical director, a chief nursing officer, a director of therapy services, and a director of business development. These
teams manage local strategy and day-to-day operations, including oversight of clinical care and treatment. They also assume
primary responsibility for developing relationships with the general acute care providers and clinicians in the local areas we serve
that refer patients to our rehabilitation hospitals. We provide our facilities within our rehabilitation hospital segment with centralized
accounting, treasury, payroll, legal, operational support, human resources, compliance, management information systems, and
billing and collection services. The centralization of these services improves efficiency and permits the staff at our rehabilitation
hospitals to focus their time on patient care.
For a description of government regulations and Medicare payments made to our rehabilitation hospitals, see “—Government
Regulations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory
Changes.”
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Rehabilitation Hospital Strategy
The key elements of our rehabilitation hospital strategy are to:
Focus on Specialized Inpatient Services. We serve patients with debilitating injuries and rehabilitation needs that cannot be
adequately cared for in a less medically intensive environment, such as a skilled nursing facility. Generally, patients in our
rehabilitation hospitals require longer stays and can benefit from more specialized and intensive clinical care than patients treated
in general acute care hospitals and require more intensive therapy than that provided in outpatient rehabilitation clinics.
Provide High-Quality Care and Service. Our rehabilitation hospitals serve a critical role in comprehensive healthcare
delivery. Through our specialized treatment programs and staffing models, we treat patients with complex and specialized medical
needs. Our specialized treatment programs focus on specific patient needs and medical conditions, such as rehabilitation programs
for brain trauma and spinal cord injuries. We also focus on specific programs of care designed to restore strength, improve physical
and cognitive function, and promote independence in activities of daily living for patients who have suffered complications from
strokes, amputations, cancer, and neurological and orthopedic conditions. Our staffing models ensure that patients have the
appropriate clinical resources over the course of their stay. We maintain quality assurance programs to support and monitor quality
of care standards and to meet regulatory requirements and maintain Medicare certifications. We believe that we are recognized
for providing quality care and service, which helps develop brand loyalty in the local areas we serve.
Our treatment programs, which are continuously reassessed and updated, benefit patients because they give our clinicians
access to the best practices and protocols that we have found to be most effective in treating various conditions such as brain and
spinal cord injuries, strokes, and neuromuscular disorders. In addition, we combine or modify these programs to provide a treatment
plan tailored to meet our patients’ unique needs. We measure the outcomes and successes of our patients’ recovery in order to
provide the best possible patient care and service.
The quality of the patient care we provide is continually monitored using several measures, including clinical outcomes
data and analyses and patient satisfaction surveys. Quality metrics from our rehabilitation hospitals are used to create monthly,
quarterly, and annual reporting for our leadership team. In order to benchmark ourselves against other hospitals, we collect our
clinical and patient satisfaction information and compare it to national standards and the results of other healthcare organizations.
We are required to report quality measures to individual states based on unique requirements and laws. We also submit required
quality data elements to CMS. See “—Government Regulations—Other Medicare Regulations—Medicare Quality Reporting.”
Control Operating Costs. We continually seek to improve operating efficiency and control costs at our rehabilitation hospitals
by standardizing operations and centralizing key administrative functions. These initiatives include:
•
•
•
centralizing administrative functions such as accounting, finance, treasury, payroll, legal, operational support, human
resources, compliance, and billing and collection;
standardizing management information systems to assist in capturing the medical record, accounting, billing,
collections, and data capture and analysis; and
centralizing sourcing and contracting to receive discounted prices for pharmaceuticals, medical supplies, and other
commodities used in our operations.
Increase Commercial Volume. We have focused on continued expansion of our relationships with commercial insurers to
increase our volume of patients with commercial insurance in our rehabilitation hospitals. We believe that commercial payors seek
to contract with our rehabilitation hospitals because we offer our patients high-quality, cost-effective care at more attractive rates
than general acute care hospitals. We also offer commercial enrollees customized and comprehensive rehabilitation treatment
programs not typically offered in general acute care hospitals.
Develop Rehabilitation Hospitals through Pursuing Joint Ventures with Large Healthcare Systems. By leveraging the
experience of our senior management and development team, we believe that we are well positioned to expand our portfolio of
joint ventured operations. When we identify joint venture opportunities, our development team conducts an extensive review of
the area’s referral patterns and commercial insurance rates to determine the general reimbursement trends and payor mix. Once
discussions commence with a healthcare system, we refine the specific needs of a joint venture, which could include working
capital, the construction of new space, or the leasing and renovation of existing space. A joint venture typically consists of us and
the healthcare system contributing certain post-acute care businesses into a newly formed entity. We typically function as the
manager and hold either a majority or minority ownership interest. We bring clinical expertise and clinical programs that attract
commercial payors and implement our standardized resource management programs, which may improve the clinical outcome
and enhance the financial performance of the joint venture.
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Pursue Opportunistic Acquisitions. We may grow our network of rehabilitation hospitals through opportunistic acquisitions.
When we acquire a rehabilitation hospital or a group of related facilities, a team of our professionals is responsible for formulating
and executing an integration plan. We seek to improve financial performance at such facilities by adding clinical programs that
attract commercial payors, centralizing administrative functions, and implementing our standardized resource management
programs.
Outpatient Rehabilitation
We are the largest operator of outpatient rehabilitation clinics in the United States based on number of facilities, with 1,662
facilities throughout 37 states and the District of Columbia as of December 31, 2018. Our outpatient rehabilitation clinics are
typically located in a medical complex or retail location. Our outpatient rehabilitation segment employed approximately 10,400
people as of December 31, 2018.
In our outpatient rehabilitation clinics, we provide physical, occupational, and speech rehabilitation programs and services.
We also provide certain specialized programs such as functional programs for work related injuries, hand therapy, post-concussion
rehabilitation, and athletic training services. The typical patient in one of our outpatient rehabilitation clinics suffers from
musculoskeletal impairments that restrict his or her ability to perform normal activities of daily living. These impairments are
often associated with accidents, sports injuries, work related injuries, or post-operative orthopedic and other medical conditions.
Our rehabilitation programs and services are designed to help these patients minimize physical and cognitive impairments and
maximize functional ability. We also provide services designed to prevent short term disabilities from becoming chronic conditions.
Our rehabilitation services are provided by our professionals including licensed physical therapists, occupational therapists, and
speech-language pathologists.
Outpatient rehabilitation patients are generally referred or directed to our clinics by a physician, employer, or health insurer
who believes that a patient, employee, or member can benefit from the level of therapy we provide in an outpatient setting. In
recent years, a number of states have enacted laws that allow individuals to seek outpatient physical rehabilitation services without
a physician order. Currently, this population of patients is not significant. In our outpatient rehabilitation segment, for the year
ended December 31, 2018, approximately 84% of our net operating revenues come from commercial payors, including healthcare
insurers, managed care organizations, workers’ compensation programs, contract management services, and private pay sources.
We believe that our services are attractive to healthcare payors who are seeking to provide high-quality and cost-effective care to
their enrollees. The balance of our reimbursement is derived from Medicare and other government sponsored programs.
For a description of government regulations and Medicare payments made to our outpatient rehabilitation services, see “—
Government Regulations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Regulatory Changes.”
Outpatient Rehabilitation Strategy
The key elements of our outpatient rehabilitation strategy are to:
Provide High-Quality Care and Service. We are focused on providing a high level of service to our patients throughout their
entire course of treatment. To measure satisfaction with our service we have developed surveys for both patients and physicians.
Our clinics utilize the feedback from these surveys to continuously refine and improve service levels. We believe that by focusing
on quality care and offering a high level of customer service we develop brand loyalty which allows us to strengthen our relationships
with referring physicians, employers, and health insurers to drive additional patient volume.
Increase Market Share. We strive to establish a leading presence within the local areas we serve. To increase our presence,
we seek to open new clinics in our existing markets. This allows us to realize economies of scale, heightened brand loyalty, and
workforce continuity. We also focus on increasing our workers’ compensation and commercial/managed care payor mix.
Expand Rehabilitation Programs and Services. Through our local clinical directors of operations and clinic managers within
their service areas, we assess the healthcare needs of the areas we serve. Based on these assessments, we implement additional
programs and services specifically targeted to meet demand in the local community. In designing these programs we benefit from
the knowledge we gain through our national network of clinics. This knowledge is used to design programs that optimize treatment
methods and measure changes in health status, clinical outcomes, and patient satisfaction.
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Optimize Payor Contract Reimbursements. We review payor contracts scheduled for renewal and potential new payor
contracts to assure reasonable reimbursements for the services we provide. Before we enter into a new contract with a commercial
payor, we evaluate it with the aid of our contract management system. We assess the reasonableness of the reimbursements by
evaluating past and projected patient volume and clinic capacity. We create a retention strategy for the top performing contracts
and a renegotiation strategy for contracts that do not meet our defined criteria. We believe that our national footprint and our strong
reputation enable us to negotiate favorable reimbursement rates with commercial insurers.
Maintain Strong Community and Employee Relations. We believe that the relationships between our employees and the
referral sources in their communities are critical to our success. Our referral sources, such as physicians and healthcare case
managers, send their patients to our clinics based on three factors: the quality of our care, the customer service we provide, and
their familiarity with our therapists. We seek to retain and motivate our therapists by implementing a performance-based bonus
program, a defined career path with the ability to be promoted from within, timely communication on company developments,
and internal training programs. We also focus on empowering our employees by giving them a high degree of autonomy in
determining local area strategy. We seek to identify therapists who are potential business leaders. This management approach
reflects the unique nature of each local area in which we operate and the importance of encouraging our employees to assume
responsibility for their clinic’s financial and operational performance.
Pursue Opportunistic Acquisitions. We may grow our network of outpatient rehabilitation facilities through opportunistic
acquisitions. We believe our size and centralized infrastructure allow us to take advantage of operational efficiencies and improve
financial performance at acquired facilities.
Concentra
We are the largest provider of occupational health services in the United States based on the number of facilities. As of
December 31, 2018, we operated 524 occupational health centers, 124 onsite clinics at employer worksites, and 31 CBOCs
throughout 44 states. In some of our occupational health centers we also provide urgent care services. On February 1, 2018, we
acquired U.S HealthWorks, an occupational medicine and urgent care service provider, as part of our Concentra segment. We
deliver occupational medicine, consumer health, physical therapy, and veteran’s healthcare services in our occupational health
centers, onsite clinics located at the workplaces of our employer customers, and our CBOCs. Our Concentra segment employed
approximately 11,200 people as of December 31, 2018.
We offer a range of occupational and consumer health services through our occupational health centers and onsite clinics.
Occupational health services include workers’ compensation injury care as well as employer services, clinical testing, wellness
programs, and preventative care. Our services at the CBOCs include primary care, specialty care, sub-specialty care, mental health,
and pharmacy benefits. Consumer health consists of non-employer, patient-directed treatment of injuries and illnesses. Our
consumer health service offerings include urgent care, wellness programs, and preventative care.
Occupational medicine refers to the diagnosis and treatment of work-related injuries (workers’ compensation), compliance
services, such as preventive services, including pre-employment, fitness-for-duty, and post-accident physical examinations and
substance abuse screening. Utilization is driven by the needs of labor-intensive industries such as transportation, distribution/
warehousing, manufacturing, construction, healthcare, police/fire, and other occupations that have historically posed a higher than
average risk of workplace injury or that require a workplace physical. Workers’ compensation is the form of insurance that provides
medical coverage to employees with work-related illnesses or injuries.
Workers’ compensation is administered on a state-by-state basis and each state is responsible for implementing and regulating
its own workers’ compensation program. Because workers’ compensation benefits are mandated by law and subject to extensive
regulation, insurers, third-party administrators, and employers do not have the same flexibility to alter benefits as they have with
other health benefit programs. In addition, because programs vary by state, it is difficult for insurance companies and multi-state
employers to adopt uniform policies to administer, manage, and control the costs of benefits across states. As a result, managing
the cost of workers’ compensation requires approaches that are tailored to the specific regulatory environments in which the
employer operates. For the year ended December 31, 2018, approximately 58% of our Concentra segment operating revenues
came from workers’ compensation payments.
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Acquisition of U.S. HealthWorks
On February 1, 2018, pursuant to the terms of the Equity Purchase and Contribution Agreement, dated October 22, 2017
with Concentra, Concentra Group Holdings Parent, U.S. HealthWorks (“U.S. Healthworks”) and Dignity Health Holding
Corporation (“DHHC”), Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, an occupational
medicine and urgent care service provider. Concentra acquired U.S. HealthWorks for $753.6 million. DHHC, a subsidiary of
Dignity Health, was issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The
remainder of the purchase price was paid in cash. Select currently retains a majority voting interest in Concentra Group Holdings
Parent.
Concentra used borrowings under its first lien credit agreement and its second lien credit agreement, together with cash on
hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to DHHC, to finance the
redemption and reorganization transactions executed under the Purchase Agreement, and to pay fees and expenses associated with
the financing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments and
Contingencies” for a description of Concentra’s indebtedness arrangements.
Concentra Strategy
The key elements of our Concentra strategy are to:
Provide High-Quality Care and Service. We strive to provide a high level of service to our patients and our employer
customers. We measure and monitor patient and employer satisfaction and focus on treatment programs to provide the best clinical
outcomes in a consistent manner. Our programs and services have proven that aggressive treatment and management of workers
injuries can more rapidly restore employees to better health which reduces workers’ compensation indemnity claim costs for our
employer customers.
Focus on Occupational Medicine. Our history as an industry leader in the provision of occupational medicine services
provides the platform for Concentra to grow this service offering. Complementary service offerings help drive additional growth
in this business line.
Pursue Direct Employer Relationships. We believe we provide occupational health services in a cost-effective manner to
our employer customers. By establishing direct relationships with these customers, we seek to reduce overall costs of their workers’
compensation claims, while improving employee health, and getting their employees back to work faster.
Increase Presence in the Areas We Serve. We strive to establish a strong presence within the local areas we serve. To increase
our presence, we seek to expand our services and programs and to open new occupational health centers and employer onsite
locations. This allows us to realize economies of scale, heightened brand loyalty, and workforce continuity.
Pursue Opportunistic Acquisitions. We may grow our network and expand our geographic reach through opportunistic
acquisitions, such as the acquisition of U.S. HealthWorks. We believe our size and centralized infrastructure allow us to take
advantage of operational efficiencies and improve financial performance at acquired facilities.
Other
Other activities include our corporate services and certain other minority investments in other healthcare related businesses.
These include investments in companies that provide specialized technology and services to healthcare entities, as well as providers
of complementary services.
Our Competitive Strengths
We believe that the success of our business model is based on a number of competitive strengths, including our position as
a leading operator in each of our business segments, our proven financial performance, our strong cash flow, our significant scale,
our experience in completing and integrating acquisitions, our partnerships with large healthcare systems, our ability to capitalize
on consolidation opportunities, and our experienced management team.
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Leading Operator in Distinct but Complementary Lines of Business. We believe that we are a leading operator in our business
segments based on number of facilities in the United States. Our leadership position and reputation as a high-quality, cost-effective
healthcare provider in each of our business segments allows us to attract patients and employees, aids us in our marketing efforts
to referral sources, and helps us negotiate payor contracts. In our critical illness recovery hospital segment, we operated 96 critical
illness recovery hospitals in 27 states as of December 31, 2018. In our rehabilitation hospital segment, we operated 26 rehabilitation
hospitals in 11 states as of December 31, 2018. In our outpatient rehabilitation segment, we operated 1,662 outpatient rehabilitation
clinics in 37 states and the District of Columbia as of December 31, 2018. In our Concentra segment, we operated 524 occupational
health centers in 41 states as of December 31, 2018. With these leading positions in the areas we serve, we believe that we are
well-positioned to benefit from the rising demand for medical services due to an aging population in the United States, which will
drive growth across our business segments.
Proven Financial Performance and Strong Cash Flow. We have established a track record of improving the financial
performance of our facilities due to our disciplined approach to revenue growth, expense management, and focus on free cash
flow generation. This includes regular review of specific financial metrics of our business to determine trends in our revenue
generation, expenses, billing, and cash collection. Based on the ongoing analysis of such trends, we make adjustments to our
operations to optimize our financial performance and cash flow.
Significant Scale. By building significant scale in each of our business segments, we have been able to leverage our operating
costs by centralizing administrative functions at our corporate office.
Experience in Successfully Completing and Integrating Acquisitions. Since our inception in 1997 through 2018, we
completed ten significant acquisitions for approximately $3.32 billion, which includes $418.6 million paid to acquire
Physiotherapy, $1.05 billion paid to acquire Concentra, and $753.6 million paid to acquire U.S. HealthWorks. We believe that we
have improved the operating performance of these businesses over time by applying our standard operating practices and by
realizing efficiencies from our centralized operations and management.
Experience in Partnering with Large Healthcare Systems. Over the past several years we have partnered with large healthcare
systems to provide post-acute care services. We believe that we provide operating expertise to these ventures through our experience
in operating critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation facilities and have improved
and expanded the level of post-acute care services provided in these communities, as well as the financial performance of these
operations.
Well-Positioned to Capitalize on Consolidation Opportunities. We believe that we are well-positioned to capitalize on
consolidation opportunities within each of our business segments and selectively augment our internal growth. We believe that
each of our business segments is largely fragmented, with many of the nation’s critical illness recovery hospitals, rehabilitation
hospitals, outpatient rehabilitation facilities, and occupational health centers operated by independent operators lacking national
or broad regional scope. With our geographically diversified portfolio of facilities in the United States, we believe that our footprint
provides us with a wide-ranging perspective on multiple potential acquisition opportunities.
Experienced and Proven Management Team. Prior to co-founding our company with our current Executive Chairman and
Co-Founder, our Vice Chairman and Co-Founder founded and operated three other healthcare companies focused on inpatient and
outpatient rehabilitation services. The other members of our senior management team also have extensive experience in the
healthcare industry, with an average of almost 25 years in the business. In recent years, we have reorganized our operations to
expand executive talent and ensure management continuity.
11
Sources of Net Operating Revenues
The following table presents the approximate percentages by source of net operating revenue received for healthcare services
we provided for the periods indicated:
Net Operating Revenues by Payor Source
Medicare
Commercial insurance(1)
Workers’ Compensation
Private and other(2)
Medicaid
Total
Year Ended December 31,
2016
2017
2018
30.0%
34.1%
17.1%
15.8%
3.0%
30.1%
34.4%
17.2%
15.3%
3.0%
26.6%
31.8%
22.1%
16.8%
2.7%
100.0%
100.0%
100.0%
_______________________________________________________________________________
(1)
Primarily includes commercial healthcare insurance carriers, health maintenance organizations, preferred provider
organizations, and managed care programs.
(2)
Primarily includes management services, employer services, self-payors, and non-patient related payments. Self-pay
revenues represent less than 1% of total net operating revenues for all periods.
Government Sources
Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled persons,
and persons with end-stage renal disease. Medicaid is a federal-state funded program, administered by the states, which provides
medical benefits to individuals who are unable to afford healthcare. As of December 31, 2018, we operated 96 critical illness
recovery hospitals, all of which were certified by Medicare as LTCHs. Also as of December 31, 2018, we operated 26 rehabilitation
hospitals, all of which were certified by Medicare as IRFs . Our outpatient rehabilitation clinics regularly receive Medicare payments
for their services. Our Concentra segment receives payments from the Department of Veterans Affairs and other governmental
programs. Additionally, many of our critical illness recovery hospitals and rehabilitation hospitals participate in state Medicaid
programs. Amounts received under the Medicare and Medicaid programs are generally less than the customary charges for the
services provided. In recent years, there have been significant changes made to the Medicare and Medicaid programs. Since a
significant portion of our revenues come from patients covered under the Medicare program, our ability to operate our business
successfully in the future will depend in large measure on our ability to adapt to changes in the Medicare program. See “—
Government Regulations—Overview of U.S. and State Government Reimbursements.”
Non-Government Sources
Our non-government sources of net operating revenue include insurance companies, workers’ compensation programs, health
maintenance organizations, preferred provider organizations, other managed care companies, and employers, as well as patients
directly.
Employees
As of December 31, 2018, we employed approximately 47,100 people throughout the United States. Approximately 33,700
of our employees are full-time and the remaining approximately 13,400 are part-time employees. Our critical illness recovery
hospital segment employees totaled approximately 13,500, rehabilitation hospital segment employees totaled approximately
10,100, outpatient rehabilitation segment employees totaled approximately 10,400, and Concentra segment employees totaled
approximately 11,200. Approximately 1,900 of the remaining employees performed corporate management, administration, and
other support services primarily at our Mechanicsburg, Pennsylvania headquarters.
12
Competition
Critical Illness Recovery Hospitals and Rehabilitation Hospitals
Our critical illness recovery hospitals and our rehabilitation hospitals both compete on the basis of the quality of the patient
services we provide, the outcomes we achieve for our patients, and the prices we charge for our services. The primary competitive
factors in both of our critical illness recovery hospital and rehabilitation hospital segments include quality of services, charges for
services, and responsiveness to the needs of patients, families, payors, and physicians. Other companies operate critical illness
recovery hospitals and rehabilitation hospitals that compete with our own hospitals, including large operators of similar facilities,
such as Kindred Healthcare Inc. and Encompass Health Corporation, and rehabilitation units and step-down units operated by
acute care hospitals in the markets we serve. The competitive position of a critical illness recovery hospital or a rehabilitation
hospital is also affected by the ability of its management to negotiate contracts with purchasers of group healthcare services,
including private employers, managed care companies, preferred provider organizations, and health maintenance organizations.
Such organizations attempt to obtain discounts from established critical illness recovery hospital or rehabilitation hospital charges.
The importance of obtaining contracts with preferred provider organizations, health maintenance organizations, and other
organizations which finance healthcare, and its effect on a critical illness recovery hospital’s or rehabilitation hospital’s competitive
position, vary from area to area depending on the number and strength of such organizations.
Outpatient Rehabilitation Clinics
Our outpatient rehabilitation clinics face a highly fragmented and competitive environment. The primary competitors that
provide outpatient rehabilitation services include physician-owned physical therapy clinics, dedicated locally owned and managed
outpatient rehabilitation clinics, and hospital or university owned or affiliated ventures, as well as national and regional providers
in select areas, including Athletico Physical Therapy, ATI Physical Therapy, U.S. Physical Therapy, and Upstream Rehabilitation.
Some of these competing clinics have longer operating histories and greater name recognition in these communities than our
clinics, and they may have stronger relations with physicians in these communities on whom we rely for patient referrals. Because
the barriers to entry are not substantial and current customers have the flexibility to move easily to new healthcare service providers,
we believe that new outpatient physical therapy competitors can emerge relatively quickly.
Concentra
Our Concentra segment’s occupational health services, consumer health, and veteran’s healthcare business face a highly
fragmented and competitive environment. The primary competitors that provide occupational health services have typically been
independent physicians, hospital emergency departments, and hospital-owned or hospital-affiliated medical facilities. Because
the barriers to entry are not substantial and Concentra’s current customers have the flexibility to move easily to new healthcare
service providers, we believe that new competitors to Concentra can emerge relatively quickly. Furthermore, urgent care clinics
in the local communities Concentra serves provide services similar to those Concentra offers, and, in some cases, competing
facilities are more established or newer than Concentra’s, may offer a broader array of services to patients than Concentra’s, and
may have larger or more specialized medical staffs to treat and serve patients.
Government Regulations
General
The healthcare industry is required to comply with many complex laws and regulations at the federal, state, and local
government levels. These laws and regulations require that hospitals and facilities furnishing outpatient services (including
outpatient rehabilitation clinics, Concentra occupational health centers, onsite clinics, and CBOCs) comply with various
requirements and standards. These laws and regulations include those relating to the adequacy of medical care, facilities and
equipment, personnel, operating policies and procedures, and recordkeeping, as well as standards for reimbursement, fraud and
abuse prevention, and health information privacy and security. These laws and regulations are extremely complex, often overlap
and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. If we fail to
comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to
operate and our ability to participate in the Medicare, Medicaid, and other federal and state healthcare programs.
13
Facility Licensure
Our healthcare facilities are subject to state and local licensing statutes and regulations ranging from the adequacy of medical
care to compliance with building codes and environmental protection laws. In order to assure continued compliance with these
various regulations, governmental and other authorities periodically inspect our facilities, both at scheduled intervals and in
response to complaints from patients and others. While our facilities intend to comply with existing licensing standards, there can
be no assurance that regulatory authorities will determine that all applicable requirements are fully met at any given time. In
addition, the state and local licensing laws are subject to changes or new interpretations that could impose additional burdens on
our facilities. A determination by an applicable regulatory authority that a facility is not in compliance with these requirements
could lead to the imposition of corrective action, assessment of fines and penalties, or loss of licensure, Medicare enrollment,
certification or accreditation. These consequences could have an adverse effect on our company.
Some states still require us to get approval under certificate of need regulations when we create, acquire, or expand our
facilities or services, or alter the ownership of such facilities, whether directly or indirectly. The certificate of need regulations
vary from state to state, and are subject to change and new interpretation. If we fail to show public need and obtain approval in
these states for our new facilities or changes to the ownership structure of existing facilities, we may be subject to civil or even
criminal penalties, lose our facility license, or become ineligible for reimbursement.
Professional Licensure, Corporate Practice and Fee-Splitting Laws
Healthcare professionals at our critical illness recovery hospitals, our rehabilitation hospitals, and our facilities furnishing
outpatient services are required to be individually licensed or certified under applicable state law. We take steps to ensure that our
employees and agents possess all necessary licenses and certifications.
Some states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine
through the direct employment of physicians or from exercising control over medical decisions by physicians. Some states similarly
prohibit the “corporate practice of therapy.” The laws relating to corporate practice vary from state to state and are not fully
developed in each state in which we have facilities. Typically, however, professional corporations owned and controlled by licensed
professionals are exempt from corporate practice restrictions and may employ physicians or therapists to furnish professional
services. Also, in some states, hospitals are permitted to employ physicians.
Some states also prohibit entities from engaging in certain financial arrangements, such as fee-splitting, with physicians or
therapists. The laws relating to fee-splitting also vary from state to state and are not fully developed. Generally, these laws restrict
business arrangements that involve a physician or therapist sharing medical fees with a referral source, but in some states these
laws have been interpreted to extend to management agreements between physicians or therapists and business entities under some
circumstances.
We believe that each of our facilities, licensed physicians, and therapists comply with any current corporate practice and
fee-splitting laws of the state in which they are located. In states where we are prohibited by the corporate practice of medicine
from directly employing licensed physicians, we typically enter into management agreements with professional corporations that
are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services
in our facilities. Under those management agreements, we perform only non-medical administrative services, do not exercise
control over the practice of medicine by the physicians, and structure compensation to avoid fee-splitting. In those states that apply
the corporate practice of therapy prohibition, we either contract to obtain therapy services from an entity permitted to employ
therapists or we manage the physical therapy practice owned by licensed therapists through which the therapy services are provided.
Although we believe that our facilities comply with corporate practice and fee-splitting laws, if new regulations or judicial
or administrative interpretations establish that our facilities do not comply with these laws, we could be subject to civil and perhaps
criminal penalties. In addition, if any of our facilities is determined not to comply with corporate practice and fee-splitting laws,
certain of our agreements relating to the facility may be determined to be unenforceable, including our management agreements
with the professional corporations furnishing physician services or our payment arrangements with insurers or employers. Future
interpretations of corporate practice and fee-splitting laws, the enactment of new legislation, or the adoption of new regulations
relating to these laws could cause us to have to restructure our business operations or close our facilities in a particular state. Any
such penalties, determinations of unenforceability, or interpretations could have a material adverse effect on our business.
14
Medicare Enrollment and Certification
In order to participate in the Medicare program and receive Medicare reimbursement, each facility must comply with the
applicable regulations of the United States Department of Health and Human Services relating to, among other things, the type
of facility, its equipment, its personnel, and its standards of medical care, as well as compliance with all applicable state and local
laws and regulations. As of December 31, 2018, all of the critical illness recovery hospitals we operated were certified by Medicare
as LTCHs. As of December 31, 2018, all of the rehabilitation hospitals we operated were certified by Medicare as IRFs. In addition,
we provide the majority of our outpatient rehabilitation services through outpatient rehabilitation clinics certified by Medicare as
rehabilitation agencies or “rehab agencies,” which operate as outpatient rehabilitation providers for the purposes of the Medicare
program. Our Concentra occupational health centers furnishing outpatient services are generally enrolled in Medicare as suppliers.
Accreditation
Our critical illness recovery hospitals and our rehabilitation hospitals receive accreditation from TJC, DNV and/or CARF.
As of December 31, 2018, all of the 96 critical illness recovery hospitals and all of the 26 rehabilitation hospitals we operated
were accredited by TJC or DNV. In addition, 12 of our rehabilitation hospitals have also received accreditation from CARF. Where
required under our contracts with the Department of Veterans Affairs, our facilities furnishing outpatient services that operate as
CBOCs are accredited by TJC or another healthcare accrediting organization. See “—Government Regulations—Veterans Affairs.”
Workers’ Compensation
Workers’ compensation is a state mandated, comprehensive insurance program that requires employers to fund or insure
medical expenses, lost wages, and other costs resulting from work related injuries and illnesses. Workers’ compensation benefits
and arrangements vary from state to state, and are often highly complex. In some states, payment for services covered by workers’
compensation programs are subject to cost containment features, such as requirements that all workers’ compensation injuries be
treated through a managed care program, or the imposition of fee schedules or payment caps for services furnished to injured
employees. Some state workers’ compensation laws limit the ability of an employer to select the providers furnishing care to
injured employees. Several states require that physicians furnishing non-emergency services to workers’ compensation patients
must register with the applicable state agency and undergo special continuing education and training. Workers’ compensation
programs may also impose other requirements that affect the operations of our facilities furnishing outpatient services. Net operating
revenues generated directly from workers’ compensation programs represented approximately 18% of our net operating revenue
from our outpatient rehabilitation segment, 1% of our net operating revenue from our critical illness recovery hospital segment,
2% of our net operating revenue from our rehabilitation hospital segment, and 58% of our net operating revenue from our Concentra
segment for the year ended December 31, 2018.
Our facilities furnishing outpatient services are reimbursed for services furnished to injured workers by payors pursuant to
the applicable state workers’ compensation statutes. Most of the states in which we maintain operations reimburse providers for
services payable under workers’ compensation laws pursuant to a treatment-specific fee schedule with established maximum
reimbursement levels. In states without such fee schedules, healthcare providers are often reimbursed based on “usual and
customary” fees benchmarked by market data and negotiated by providers with payors and networks.
Inadequate increases to the applicable fee schedule amounts for our services, and changes in state workers’ compensation
laws, including cost containment initiatives, could have a negative impact on the operations and financial performance of those
facilities.
Veterans Affairs
As of December 31, 2018, we had 31 CBOCs, which were established to provide services to veterans residing in catchment
areas under agreements with the Department of Veterans Affairs. The awarding of such agreements is regulated by laws related
to federal government procurements generally, including the Federal Acquisition Regulations. Our contracts with the Department
of Veterans Affairs include administrative and clinical services, performance standards, qualifications and other contractor
requirements and information and security requirements. In general, our facilities furnishing outpatient services that are CBOCs
provide outpatient primary care and mental healthcare in exchange for a capitated monthly fee based on the number of eligible
patients then enrolled in that CBOC.
15
Overview of U.S. and State Government Reimbursements
Medicare Program in General
The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally
persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is
governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and
CMS. The table below shows the percentage of net operating revenues generated directly from the Medicare program for each of
our segments and our company as a whole for the fiscal years ended December 31, 2016, 2017 and 2018.
Medicare Net Operating Revenues by Segment
2016
2017
2018
Year Ended December 31,
Critical illness recovery hospital
Rehabilitation hospital
Outpatient rehabilitation
Concentra
Total Company
53.3%
38.4%
13.9%
0.2%
30.0%
52.4%
41.6%
14.8%
0.2%
30.1%
50.9%
41.5%
15.2%
0.1%
26.6%
The Medicare program reimburses various types of providers, including LTCHs, IRFs, and outpatient rehabilitation providers,
using different payment methodologies. The Medicare reimbursement systems specific to LTCHs, IRFs, and outpatient
rehabilitation providers, as described herein, are different than the system applicable to general acute care hospitals. If any of our
hospitals fail to comply with requirements for payment under Medicare reimbursement systems for LTCHs or IRFs, as applicable,
that hospital will be paid under the system applicable to general acute care hospitals. For general acute care hospitals, Medicare
payments for inpatient care are made under the inpatient prospective payment system (“IPPS”) under which a hospital receives a
fixed payment amount per discharge (adjusted for area wage differences) using Medicare severity diagnosis-related groups (“MS-
DRGs”). The general acute care hospital MS-DRG payment rate is based upon the national average cost of treating a Medicare
patient’s condition, based on severity levels of illness, in that type of facility. Although the average length of stay varies for each
MS-DRG, the average stay of all Medicare patients in a general acute care hospital is substantially less than the average length
of stay in LTCHs and IRFs. Thus, the prospective payment system for general acute care hospitals creates an economic incentive
for those hospitals to discharge medically complex Medicare patients to a post-acute care setting as soon as clinically possible.
Effective October 1, 2005, CMS expanded its post-acute care transfer policy under which general acute care hospitals are paid on
a per diem basis rather than the full MS-DRG rate if a patient is discharged early to certain post-acute care settings, including
LTCHs and IRFs. When a patient is discharged from selected MS-DRGs to, among other providers, an LTCH or IRF, the general
acute care hospital may be reimbursed below the full MS-DRG payment if the patient’s length of stay is less than the geometric
mean length of stay for the MS-DRG.
Medicare Reimbursement of LTCH Services
The Medicare payment system for LTCHs is based on a prospective payment system specifically applicable to LTCHs
(“LTCH-PPS”). The policies and payment rates under LTCH-PPS are subject to annual updates and revisions. Under LTCH-PPS,
each patient discharged from an LTCH is assigned to a distinct “MS-LTC-DRG,” which is a Medicare severity long-term care
diagnosis-related group for LTCHs, and an LTCH is generally paid a pre-determined fixed amount applicable to the assigned MS-
LTC-DRG (adjusted for area wage differences), subject to exceptions for short stay and high cost outlier patients (described below).
CMS assigns relative weights to each MS-LTC-DRG to reflect their relative use of medical care resources. The payment amount
for each MS-LTC-DRG is intended to reflect the average cost of treating a Medicare patient assigned to that MS-LTC-DRG in an
LTCH.
Standard Federal Rate
Payment under the LTCH-PPS is dependent on determining the patient classification, that is, the assignment of the case to
a particular MS-LTC-DRG, the weight of the MS-LTC-DRG, and the standard federal payment rate. There is a single standard
federal rate that encompasses both the inpatient operating costs, which includes a labor and non-labor component, and capital-
related costs that CMS updates on an annual basis. LTCH-PPS also includes special payment policies that adjust the payments for
some patients based on the patient’s length of stay, the facility’s costs, whether the patient was discharged and readmitted, and
other factors.
16
Patient Criteria
The BBA of 2013, enacted December 26, 2013, establishes a dual-rate LTCH-PPS for Medicare patients discharged from
an LTCH. Specifically, for Medicare patients discharged in cost reporting periods beginning on or after October 1, 2015, LTCHs
will be reimbursed at the LTCH-PPS standard federal payment rate only if, immediately preceding the patient’s LTCH admission,
the patient was discharged from a “subsection (d) hospital” (generally, a short-term acute care hospital paid under IPPS) and either
the patient’s stay included at least three days in an intensive care unit (ICU) or coronary care unit (CCU) at the subsection (d)
hospital, or the patient was assigned to an MS-LTC-DRG for cases receiving at least 96 hours of ventilator services in the LTCH.
In addition, to be paid at the LTCH-PPS standard federal payment rate, the patient’s discharge from the LTCH may not include a
principal diagnosis relating to psychiatric or rehabilitation services. For any Medicare patient who does not meet these criteria,
the LTCH will be paid a lower “site-neutral” payment rate, which will be the lower of: (i) the IPPS comparable per-diem payment
rate capped at the MS-DRG payment rate plus any outlier payments; or (ii) 100 percent of the estimated costs for services.
The site neutral payment rate for those patients not paid at the LTCH-PPS standard federal payment rate is subject to a
transition period. During the transition period (applicable to hospital cost reporting periods beginning on or after October 1, 2015
through September 30, 2019), a blended rate will be paid for Medicare patients not meeting the new criteria that is equal to 50%
of the site neutral payment rate amount and 50% of the standard federal payment rate amount. For discharges in cost reporting
periods beginning on or after October 1, 2019, only the site neutral payment rate will apply for Medicare patients not meeting the
new criteria. For hospital discharges beginning on or after October 1, 2017 through September 30, 2026, the IPPS comparable per
diem payment amount (including any applicable outlier payment) used to determine the site neutral payment rate will be reduced
by 4.6% after any annual payment rate update.
In addition, for cost reporting periods beginning on or after October 1, 2019, LTCH patient criteria compliant discharges
from an LTCH will continue to be paid at the LTCH-PPS standard federal payment rate, unless the number of Medicare discharges
for which payment is made under the site-neutral payment rate is greater than 50% of the total number of discharges from the
LTCH for that period. If the number of Medicare discharges for which payment is made under the site-neutral payment rate is
greater than 50%, then beginning in the next cost reporting period all Medicare discharges from the LTCH will be reimbursed at
the site-neutral payment rate. The BBA of 2013 requires CMS to establish a process for an LTCH subject to only the site-neutral
payment rate to be reinstated for payment under the dual-rate LTCH-PPS.
Payment adjustments, including the interrupted stay policy (discussed herein), apply to LTCH discharges regardless of
whether the case is paid at the standard federal payment rate or the site-neutral payment rate. However, short stay outlier payment
adjustments do not apply to cases paid at the site-neutral payment rate. CMS calculates the annual recalibration of the MS-LTC-
DRG relative payment weighting factors using only data from LTCH discharges that meet the criteria for exclusion from the site-
neutral payment rate. In addition, CMS applies the IPPS fixed-loss amount for high cost outliers to site-neutral cases, rather than
the LTCH-PPS fixed-loss amount. CMS calculates the LTCH-PPS fixed-loss amount using only data from cases paid at the LTCH-
PPS payment rate, excluding cases paid at the site-neutral rate.
Short Stay Outlier Policy
CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five-
sixths of the geometric average length of stay for that particular MS-LTC-DRG, referred to as a short stay outlier (“SSO”). SSO
cases are paid based on a per diem rate derived from blending 120% of the MS LTC DRG specific per diem amount with a per
diem rate based on the general acute care hospital IPPS. Under this policy, as the length of stay of a SSO case increases, the
percentage of the per diem payment amounts based on the full MS-LTCH-DRG standard federal payment rate increases and the
percentage of the payment based on the IPPS comparable amount decreases.
High Cost Outliers
Some cases are extraordinarily costly, producing losses that may be too large for hospitals to offset. Cases with unusually
high costs, referred to as “high cost outliers,” receive a payment adjustment to reflect the additional resources utilized. CMS
provides an additional payment if the estimated costs for the patient exceed the adjusted MS-LTC-DRG payment plus a fixed-loss
amount that is established in the annual payment rate update.
Interrupted Stays
An interrupted stay is defined as a case in which an LTCH patient, upon discharge, is admitted to a general acute care hospital,
IRF or skilled nursing facility/swing-bed and then returns to the same LTCH within a specified period of time. If the length of
stay at the receiving provider is equal to or less than the applicable fixed period of time, it is considered to be an interrupted stay
case and the case is treated as a single discharge for the purposes of payment to the LTCH. For interrupted stays of three days or
less, Medicare payments for any test, procedure, or care provided to an LTCH patient on an outpatient basis or for any inpatient
treatment during the “interruption” would be the responsibility of the LTCH.
17
Freestanding, HIH, and Satellite LTCHs
LTCHs may be organized and operated as freestanding facilities or as HIHs. As its name suggests, a freestanding LTCH is
not located on the campus of another hospital. For such purpose, “campus” means the physical area immediately adjacent to a
hospital’s main buildings, other areas, and structures that are not strictly contiguous to a hospital’s main buildings but are located
within 250 yards of its main buildings, and any other areas determined, on an individual case basis by the applicable CMS regional
office, to be part of a hospital’s campus. Conversely, an HIH is an LTCH that is located on the campus of another hospital. An
LTCH, whether freestanding or an HIH, that uses the same Medicare provider number of an affiliated “primary site” LTCH is
known as a “satellite.” Under Medicare policy, a satellite LTCH must be located within 35 miles of its primary site LTCH and be
administered by such primary site LTCH. A primary site LTCH may have more than one satellite LTCH. CMS sometimes refers
to a satellite LTCH that is freestanding as a “remote location.” LTCH HIHs and satellites must comply with certain requirements
to show that they operate as part of the main LTCH, and not the co-located hospital. Most or all of these requirements no longer
apply to LTCHs that are located on the same campus as other hospitals excluded from the IPPS (e.g., LTCHs and IRFs), provided
that an IPPS hospital is not also located on that campus.
Facility Certification Criteria
The LTCH-PPS regulations define the criteria that must be met in order for a hospital to be certified as an LTCH. To be
eligible for payment under the LTCH-PPS, a hospital must be primarily engaged in providing inpatient services to Medicare
beneficiaries with medically complex conditions that require a long hospital stay. In addition, by definition, LTCHs must meet
certain facility criteria, including: (i) instituting a review process that screens patients for appropriateness of an admission and
validates the patient criteria within 48 hours of each patient’s admission, evaluates regularly their patients for continuation of care,
and assesses the available discharge options; (ii) having active physician involvement with patient care that includes a physician
available on-site daily and additional consulting physicians on call; and (iii) having an interdisciplinary team of healthcare
professionals to prepare and carry out an individualized treatment plan for each patient.
An LTCH must have an average inpatient length of stay for Medicare patients (including both Medicare covered and non-
covered days) of greater than 25 days. LTCH cases paid at the site-neutral rate and Medicare Advantage cases are excluded from
the LTCH average length of stay calculation. LTCHs that fail to exceed an average length of stay of 25 days during any cost
reporting period may be paid under the general acute care hospital IPPS if not corrected within established time frames. CMS,
through its contractors, determines whether an LTCH has maintained an average length of stay of greater than 25 days during each
annual cost reporting period.
Prior to qualifying under the payment system applicable to LTCHs, a new LTCH initially receives payments under the general
acute care hospital IPPS. The LTCH must continue to be paid under this system for a minimum of six months while meeting certain
Medicare LTCH requirements, the most significant requirement being an average length of stay for Medicare patients (including
both Medicare covered and non-covered days) greater than 25 days.
25 Percent Rule
The “25 Percent Rule” was a downward payment adjustment that applied if the percentage of Medicare patients discharged
from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with
the referring hospital) exceeded the applicable percentage admissions threshold during a particular cost reporting period.
CMS was precluded from applying the 25 Percent Rule for freestanding LTCHs to cost reporting years beginning before
July 1, 2016 and for discharges occurring on or after October 1, 2016 and before October 1, 2017. In addition, the law applied
higher percentage admissions thresholds for most LTCHs operating as HIHs and satellites for cost reporting years beginning before
July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before October 1, 2017.
For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule.
For fiscal year 2019 and thereafter, CMS eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is
being implemented in a budget-neutral manner by adjusting the standard federal payment rates down such that the projection of
aggregate LTCH payments would equal the projection of aggregate LTCH payments that would have been paid if the moratorium
ended and the 25 Percent Rule went into effect on October 1, 2018. As a result, the elimination of the 25 Percent Rule includes a
temporary, one-time adjustment of 0.990878 to the fiscal year 2019 LTCH-PPS standard federal payment rate, a temporary, one-
time adjustment of 0.990737 to the fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment
of 0.991249 to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.
18
Annual Payment Rate Update
Fiscal Year 2017. On August 22, 2016, CMS published the final rule updating policies and payment rates for the LTCH-PPS
for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30,
2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during fiscal year 2016
of $41,763. The update to the standard federal rate for fiscal year 2017 included a market basket increase of 2.8%, less a productivity
adjustment of 0.3%, and less a reduction of 0.75% mandated by the Affordable Care Act (the “ACA”). The fixed loss amount for
high cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed loss amount in the 2016 fiscal year
of $16,423. The fixed loss amount for high cost outlier cases paid under the site neutral payment rate was set at $23,573, an increase
from the fixed-loss amount in the 2016 fiscal year of $22,538.
Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS
for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30,
2018). Certain errors in the final rule published on August 14, 2017 were corrected in a final rule published October 4, 2017. The
standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476.
The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment
of 0.6%, and less a reduction of 0.75% mandated by the ACA. The update to the standard federal rate for fiscal year 2018 was
further impacted by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to
1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss
amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment
rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.
Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS
for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30,
2019). Certain errors in the final rule were corrected in a final rule published October 3, 2018. The standard federal rate was set
at $41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard
federal rate for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a
reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget-neutrality factor of 0.999215
and a temporary, one-time budget-neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule
(described herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, a decrease from
the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-
neutral payment rate was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.
Medicare Reimbursement of IRF Services
IRFs are paid under a prospective payment system specifically applicable to this provider type, which is referred to as “IRF-
PPS.” Under the IRF-PPS, each patient discharged from an IRF is assigned to a case mix group (“IRF-CMG”) containing patients
with similar clinical conditions that are expected to require similar amounts of resources. An IRF is generally paid a pre-determined
fixed amount applicable to the assigned IRF-CMG (subject to applicable case adjustments related to length of stay and facility
level adjustments for location and low income patients). The payment amount for each IRF-CMG is intended to reflect the average
cost of treating a Medicare patient’s condition in an IRF relative to patients with conditions described by other IRF-CMGs. The
IRF-PPS also includes special payment policies that adjust the payments for some patients based on the patient’s length of stay,
the facility’s costs, whether the patient was discharged and readmitted and other factors.
Facility Certification Criteria
Our rehabilitation hospitals must meet certain facility criteria to be classified as an IRF by the Medicare program, including:
(i) a provider agreement to participate as a hospital in Medicare; (ii) a pre-admission screening procedure; (iii) ensuring that
patients receive close medical supervision and furnish, through the use of qualified personnel, rehabilitation nursing, physical
therapy, and occupational therapy, plus, as needed, speech therapy, social or psychological services, and orthotic and prosthetic
services; (iv) a full-time, qualified director of rehabilitation; (v) a plan of treatment for each inpatient that is established, reviewed,
and revised as needed by a physician in consultation with other professional personnel who provide services to the patient; and
(vi) a coordinated multidisciplinary team approach in the rehabilitation of each inpatient, as documented by periodic clinical entries
made in the patient’s medical record to note the patient’s status in relationship to goal attainment, and that team conferences are
held at least every two weeks to determine the appropriateness of treatment. Failure to comply with any of the classification criteria
may result in the denial of claims for payment or cause a hospital to lose its status as an IRF and be paid under the prospective
payment system that applies to general acute care hospitals.
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Patient Classification Criteria
In order to qualify as an IRF, a hospital must demonstrate that during its most recent 12-month cost reporting period, it served
an inpatient population of whom at least 60% required intensive rehabilitation services for one or more of 13 conditions specified
by regulation. Compliance with the 60% Rule is demonstrated through either medical review or the “presumptive” method, in
which a patient’s diagnosis codes are compared to a “presumptive compliance” list. For fiscal year 2018, CMS revised the 60%
Rule’s presumptive methodology (i) including certain International Classification of Diseases, Tenth Revision, Clinical
Modification (“ICD-10-CM”) diagnosis codes for patients with traumatic brain injury and hip fracture conditions and (ii) revising
the presumptive methodology list for major multiple trauma by counting IRF cases that contain two or more of the ICD-10-CM
codes from three major multiple trauma lists in the specified combinations.
Annual Payment Rate Update
Fiscal Year 2017. On August 5, 2016, CMS published the final rule updating policies and payment rates for the IRF-PPS for
fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30,
2017). The standard payment conversion factor for discharges for fiscal year 2017 was set at $15,708, an increase from the standard
payment conversion factor applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor
for fiscal year 2017 included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less a reduction of
0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2017 to $7,984 from $8,658 established
in the final rule for fiscal year 2016.
Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS for
fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30,
2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard
payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor
for fiscal year 2018 included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of
0.75% mandated by the ACA. The standard payment conversion factor for fiscal year 2018 was further impacted by the Medicare
Access and CHIP Reauthorization Act of 2015, which limited the update for fiscal year 2018 to 1.0%. CMS increased the outlier
threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.
Fiscal Year 2019. On August 6, 2018, CMS published the final rule updating policies and payment rates for the IRF-PPS for
fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30,
2019). The standard payment conversion factor for discharges for fiscal year 2019 was set at $16,021, an increase from the standard
payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor
for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of
0.75% mandated by the ACA. CMS increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established
in the final rule for fiscal year 2018.
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For
services provided in 2017 through 2019, a 0.5% update will be applied each year to the fee schedule payment rates, subject to an
adjustment beginning in 2019 under the Merit-Based Incentive Payment System (“MIPS”). For services provided in 2020 through
2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and
the alternative payment models (“APMs”). In 2026 and subsequent years eligible professionals participating in APMs that meet
certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.
Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures
performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS
requirements a provider’s performance is assessed according to established performance standards and used to determine an
adjustment factor that is then applied to the professional’s payment for a year. Each year from 2019 through 2024, professionals
who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment
arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus
payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of
incentives across payors. MIPS and APM apply to physicians and other practitioners included within the definition of “eligible
clinicians.” Currently, physical therapists and occupational therapists may voluntarily participate in MIPS and APM. In the
Medicare Physician Fee Schedule final rule for calendar year 2019, CMS adopted a final policy to include physical therapists,
occupational therapists and qualified speech-language pathologists as “eligible clinicians” and require them to participate in these
programs beginning in the 2021 MIPS payment year. The specifics of the MIPS and APM adjustments beginning in 2019 and
2020, respectively, remain subject to future notice and comment rule-making. For the year ended December 31, 2018, we received
approximately 15% of our outpatient rehabilitation net operating revenues from Medicare.
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Therapy Caps
Outpatient therapy providers reimbursed under the Medicare physician fee schedule have been subject to annual limits for
therapy expenses. For example, for the calendar year beginning January 1, 2017, the annual limit on outpatient therapy services
was $1,980 for combined physical and speech language pathology services and $1,980 for occupational therapy services. The
Bipartisan Budget Act of 2018 repealed the annual limits on outpatient therapy.
The annual limits for therapy expenses historically did not apply to services furnished and billed by outpatient hospital
departments. However, the Medicare Access and CHIP Reauthorization Act of 2015 and prior legislation extended the annual
limits on therapy expenses in hospital outpatient department settings through December 31, 2017. The application of annual limits
to hospital outpatient department settings sunset on December 31, 2017.
Prior to calendar year 2028, all therapy claims exceeding $3,000 are subject to a manual medical review process. The $3,000
threshold is applied to physical therapy and speech therapy services combined and separately applied to occupational therapy.
CMS will continue to require that an appropriate modifier be included on claims over the current exception threshold indicating
that the therapy services are medically necessary. Beginning in 2028 and in each calendar year thereafter, the threshold amount
for claims requiring manual medical review will increase by the percentage increase in the Medicare Economic Index.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants
In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS established two new modifiers to identify
services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These
modifiers were mandated by the Bipartisan Budget Act of 2018, which requires that claims for outpatient therapy services furnished
in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these
modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee
schedule rate beginning on January 1, 2022.
Other Requirements for Payment
Historically, outpatient rehabilitation services have been subject to scrutiny by the Medicare program for, among other things,
medical necessity for services, appropriate documentation for services, supervision of therapy aides and students, and billing for
single rather than group therapy when services are furnished to more than one patient. CMS has issued guidance to clarify that
services performed by a student are not reimbursed even if provided under “line of sight” supervision of the therapist. Likewise,
CMS has reiterated that Medicare does not pay for services provided by aides regardless of the level of supervision. CMS also
has issued instructions that outpatient physical and occupational therapy services provided simultaneously to two or more
individuals by a practitioner should be billed as group therapy services.
Medicare claims for outpatient therapy services furnished by therapy assistants on or after January 1, 2022 must include a
modifier indicating the service was furnished by a therapy assistant. CMS is required to develop a modifier to mark services
provided by a therapy assistant by January 1, 2019, and then submitted claims have to report the modifier mark starting January
1, 2020. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapy assistant will be paid at
an amount equal to 85% of the payment amount otherwise applicable for the service.
Medicaid Reimbursement of LTCH and IRF Services
The Medicaid program is designed to provide medical assistance to individuals unable to afford care. The program is governed
by the Social Security Act of 1965, funded jointly by each individual state and the federal government and administered by state
agencies. Medicaid payments are made under a number of different systems, which include cost based reimbursement, prospective
payment systems, or programs that negotiate payment levels with individual hospitals. In addition, Medicaid programs are subject
to statutory and regulatory changes, administrative rulings, interpretations of policy by the state agencies, and certain government
funding limitations, all of which may increase or decrease the level of program payments to our hospitals. Net operating revenues
generated directly from the Medicaid program represented approximately 7% of our critical illness recovery hospital segment net
operating revenues and 1% of our rehabilitation hospital segment net operating revenues for the year ended December 31, 2018.
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Other Healthcare Regulations
Medicare Quality Reporting
LTCHs and IRFs are subject to mandatory quality reporting requirements. LTCHs and IRFs that do not submit the required
quality data will be subject to a 2% reduction in their annual payment update. The reduction can result in payment rates less than
the prior year. However, the reduction will not carry over into the subsequent fiscal years.
LTCHs and IRFs are required to collect and report patient assessment data and clinical measures on each Medicare beneficiary
who receives inpatient services in our facilities. We began reporting this data on October 1, 2012. CMS began making this data
available to the public on the CMS website in December 2016. CMS is now adding cross-setting quality measures to compare
quality and resource data across post-acute settings pursuant to the Improving Medicare Post-Acute Care Transformation Act of
2014 (Pub. L. 113-185) (the “IMPACT Act”).
Medicare Hospital Wage Index Adjustment
As part of the methodology for determining prospective payments to LTCHs and IRFs, CMS adjusts the standard payment
amounts for area differences in hospital wage levels by a factor reflecting the relative hospital wage level in the geographic area
of the hospital compared to the national average hospital wage level. This adjustment factor is the hospital wage index. CMS
currently defines hospital geographic areas (labor market areas) based on the definitions of Core-Based Statistical Areas established
by the Office of Management and Budget. The ACA calls for CMS to develop and present to Congress a comprehensive reform
plan using Bureau of Labor Statistics data, or other data or methodologies, to calculate relative wages for each geographic area
involved. In the preamble to the proposed rule for LTCH-PPS for fiscal year 2012, CMS solicited public comments on ways to
redefine the geographic reclassification requirements to more accurately define labor markets. To date, CMS has not presented a
comprehensive reform plan to Congress.
Physician-Owned Hospital Limitations
CMS regulations include a number of hospital ownership and physician referral provisions, including certain obligations
requiring physician-owned hospitals to disclose ownership or investment interests held by the referring physician or his or her
immediate family members. In particular, physician-owned hospitals must furnish to patients, on request, a list of physicians or
immediate family members who own or invest in the hospital. Moreover, a physician-owned hospital must require all physician
owners or investors who are also active members of the hospital’s medical staff to disclose in writing their ownership or investment
interests in the hospital to all patients they refer to the hospital. CMS can terminate the Medicare provider agreement of a physician-
owned hospital if it fails to comply with these disclosure provisions or with the requirement that a hospital disclose in writing to
all patients whether there is a physician on-site at the hospital, 24 hours per day, seven days per week.
Under the transparency and program integrity provisions of the ACA, the exception to the federal self-referral law (the “Stark
Law”) that permits physicians to refer patients to hospitals in which they have an ownership or investment interest has been
dramatically curtailed. Only hospitals with physician ownership and a provider agreement in place on December 31, 2010 are
exempt from the general ban on self-referral. Existing physician-owned hospitals are prohibited from increasing the percentage
of physician ownership or investment interests held in the hospital after March 23, 2010. In addition, physician-owned hospitals
are prohibited from increasing the number of licensed beds after March 23, 2010, unless meeting specific exceptions related to
the hospital’s location and patient population. In order to retain their exemption from the general ban on self-referrals, our physician-
owned hospitals are required to adopt specific measures relating to conflicts of interest, bona fide investments and patient safety.
As of December 31, 2018, we operated six hospitals that are owned in-part by physicians.
Medicare Recovery Audit Contractors
CMS contracts with third-party organizations, known as Recovery Audit Contractors (“RACs”) to identify Medicare
underpayments and overpayments, and to authorize RACs to recoup any overpayments. The compensation paid to each RAC is
based on a percentage of overpayment recoveries identified by the RAC. CMS has selected and entered into contracts with four
RACs, each of which has begun their audit activities in specific jurisdictions. RAC audits of our Medicare reimbursement may
lead to assertions that we have been overpaid, require us to incur additional costs to respond to requests for records and pursue
the reversal of payment denials, and ultimately require us to refund any amounts determined to have been overpaid. We cannot
predict the impact of future RAC reviews on our results of operations or cash flows.
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Fraud and Abuse Enforcement
Various federal and state laws prohibit the submission of false or fraudulent claims, including claims to obtain payment
under Medicare, Medicaid, and other government healthcare programs. Penalties for violation of these laws include civil and
criminal fines, imprisonment, and exclusion from participation in federal and state healthcare programs. In recent years, federal
and state government agencies have increased the level of enforcement resources and activities targeted at the healthcare industry.
In addition, the federal False Claims Act and similar state statutes allow individuals to bring lawsuits on behalf of the government,
in what are known as qui tam or “whistleblower” actions, alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute. The use of these private enforcement actions against healthcare providers has increased dramatically in
recent years, in part because the individual filing the initial complaint is entitled to share in a portion of any settlement or judgment.
Revisions to the False Claims Act enacted in 2009 expanded significantly the scope of liability, provided for new investigative
tools, and made it easier for whistleblowers to bring and maintain False Claims Act suits on behalf of the government. See “—
Legal Proceedings.”
From time to time, various federal and state agencies, such as the Office of Inspector General of the Department of Health
and Human Services (“OIG”) issue a variety of pronouncements, including fraud alerts, the OIG’s Annual Work Plan, and other
reports, identifying practices that may be subject to heightened scrutiny. These pronouncements can identify issues relating to
LTCHs, IRFs, or outpatient rehabilitation services or providers. For example, the OIG recently announced that it will (1) determine
whether Medicare appropriately paid hospitals’ inpatient claims subject to the post-acute care transfer policy, (2) determine whether
Medicare physician payments for critical care are appropriate and paid in accordance with Medicare requirements, and (3) examine
up-coding of inpatient hospital billing by comparing how billing has changed over time and how billing varied among hospitals.
We monitor government publications applicable to us to supplement and enhance our compliance efforts.
We endeavor to conduct our operations in compliance with applicable laws, including healthcare fraud and abuse laws. If
we identify any practices as being potentially contrary to applicable law, we will take appropriate action to address the matter,
including, where appropriate, disclosure to the proper authorities, which may result in a voluntary refund of monies to Medicare,
Medicaid, or other governmental healthcare programs.
Remuneration and Fraud Measures
The federal anti-kickback statute prohibits some business practices and relationships under Medicare, Medicaid, and other
federal healthcare programs. These practices include the payment, receipt, offer, or solicitation of remuneration in connection
with, to induce, or to arrange for, the referral of patients covered by a federal or state healthcare program. Violations of the anti-
kickback law may be punished by a criminal fine of up to $50,000 or imprisonment for each violation, or both, civil monetary
penalties of $50,000 and damages of up to three times the total amount of remuneration, and exclusion from participation in federal
or state healthcare programs.
The Stark Law prohibits referrals for designated health services by physicians under the Medicare and Medicaid programs
to other healthcare providers in which the physicians have an ownership or compensation arrangement unless an exception applies.
Sanctions for violating the Stark Law include civil monetary penalties of up to $15,000 per prohibited service provided, assessments
equal to three times the dollar value of each such service provided, and exclusion from the Medicare and Medicaid programs and
other federal and state healthcare programs. The statute also provides a penalty of up to $100,000 for a circumvention scheme. In
addition, many states have adopted or may adopt similar anti-kickback or anti-self-referral statutes. Some of these statutes prohibit
the payment or receipt of remuneration for the referral of patients, regardless of the source of the payment for the care. While we
do not believe our arrangements are in violation of these prohibitions, we cannot assure you that governmental officials charged
with the responsibility for enforcing the provisions of these prohibitions will not assert that one or more of our arrangements are
in violation of the provisions of such laws and regulations.
Provider-Based Status
The designation “provider-based” refers to circumstances in which a subordinate facility (e.g., a separately certified Medicare
provider, a department of a provider, or a satellite facility) is treated as part of a provider for Medicare payment purposes. In these
cases, the services of the subordinate facility are included on the “main” provider’s cost report and overhead costs of the main
provider can be allocated to the subordinate facility, to the extent that they are shared. As of December 31, 2018, we operated 18
critical illness recovery hospitals and six rehabilitation hospitals that were treated as provider-based satellites of certain of our
other facilities, 234 of the outpatient rehabilitation clinics we operated were provider-based and are operated as departments of
the rehabilitation hospitals we operated, and we provide rehabilitation management and staffing services to hospital rehabilitation
departments that may be treated as provider-based. These facilities are required to satisfy certain operational standards in order
to retain their provider-based status.
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Health Information Practices
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) mandates the adoption of standards for the
exchange of electronic health information in an effort to encourage overall administrative simplification and enhance the
effectiveness and efficiency of the healthcare industry, while maintaining the privacy and security of health information. Among
the standards that the Department of Health and Human Services has adopted or will adopt pursuant to HIPAA are standards for
electronic transactions and code sets, unique identifiers for providers (referred to as National Provider Identifier), employers,
health plans and individuals, security and electronic signatures, privacy, and enforcement. If we fail to comply with the HIPAA
requirements, we could be subject to criminal penalties and civil sanctions. The privacy, security and enforcement provisions of
HIPAA were enhanced by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), which was
included in the ARRA. Among other things, HITECH establishes security breach notification requirements, allows enforcement
of HIPAA by state attorneys general, and increases penalties for HIPAA violations.
The Department of Health and Human Services has adopted standards in three areas in which we are required to comply
that affect our operations.
Standards relating to the privacy of individually identifiable health information govern our use and disclosure of protected
health information and require us to impose those rules, by contract, on any business associate to whom such information is
disclosed.
Standards relating to electronic transactions and code sets require the use of uniform standards for common healthcare
transactions, including healthcare claims information, plan eligibility, referral certification and authorization, claims status, plan
enrollment and disenrollment, payment and remittance advice, plan premium payments, and coordination of benefits.
Standards for the security of electronic health information require us to implement various administrative, physical, and
technical safeguards to ensure the integrity and confidentiality of electronic protected health information.
We maintain a HIPAA committee that is charged with evaluating and monitoring our compliance with HIPAA. The HIPAA
committee monitors regulations promulgated under HIPAA as they have been adopted to date and as additional standards and
modifications are adopted. Although health information standards have had a significant effect on the manner in which we handle
health data and communicate with payors, the cost of our compliance has not had a material adverse effect on our business, financial
condition, or results of operations. We cannot estimate the cost of compliance with standards that have not been issued or finalized
by the Department of Health and Human Services.
In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient and consumer privacy
concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state.
Lawsuits, including class actions and action by state attorneys general, directed at companies that have experienced a privacy or
security breach also can occur. Although our policies and procedures are aimed at complying with privacy and security requirements
and minimizing the risks of any breach of privacy or security, there can be no assurance that a breach of privacy or security will
not occur. If there is a breach, we may be subject to various penalties and damages and may be required to incur costs to mitigate
the impact of the breach on affected individuals.
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Compliance Program
Our Compliance Program
We maintain a written code of conduct (the “Code of Conduct”) that provides guidelines for principles and regulatory rules
that are applicable to our patient care and business activities. The Code of Conduct is reviewed and amended as necessary and is
the basis for our company-wide compliance program. These guidelines are implemented by our compliance officer, our compliance
and audit committee, and are communicated to our employees through education and training. We also have established a reporting
system, auditing and monitoring programs, and a disciplinary system as a means for enforcing the Code of Conduct’s policies.
Compliance and Audit Committee
Our compliance and audit committee is made up of members of our senior management and in-house counsel. The compliance
and audit committee meets, at a minimum, on a quarterly basis and reviews the activities, reports, and operation of our compliance
program. In addition, our HIPAA committee provides reports to the compliance and audit committee. Our vice president of
compliance and audit services meets with the compliance and audit committee, at a minimum, on a quarterly basis to provide an
overview of the activities and operation of our compliance program.
Operating Our Compliance Program
We focus on integrating compliance responsibilities with operational functions. We recognize that our compliance with
applicable laws and regulations depends upon individual employee actions as well as company operations. As a result, we have
adopted an operations team approach to compliance. Our corporate executives, with the assistance of corporate experts, designed
the programs of the compliance and audit committee. We utilize facility leaders for employee-level implementation of our Code
of Conduct. This approach is intended to reinforce our company-wide commitment to operate in accordance with the laws and
regulations that govern our business.
Compliance Issue Reporting
In order to facilitate our employees’ ability to report known, suspected, or potential violations of our Code of Conduct, we
have developed a system of reporting. This reporting, anonymous or attributable, may be accomplished through our toll-free
compliance hotline, compliance e-mail address, or our compliance post office box. Our compliance officer and the compliance
and audit committee are responsible for reviewing and investigating each compliance incident in accordance with the compliance
and audit services department’s investigation policy.
Compliance Monitoring and Auditing / Comprehensive Training and Education
Monitoring reports and the results of compliance for each of our business segments are reported to the compliance and audit
committee, at a minimum, on a quarterly basis. We train and educate our employees regarding the Code of Conduct, as well as
the legal and regulatory requirements relevant to each employee’s work environment. New and current employees are required to
acknowledge and certify that the employee has read, understood, and has agreed to abide by the Code of Conduct. Additionally,
all employees are required to re-certify compliance with the Code of Conduct on an annual basis.
Policies and Procedures Reflecting Compliance Focus Areas
We review our policies and procedures for our compliance program from time to time in order to improve operations and
to ensure compliance with requirements of standards, laws, and regulations and to reflect the ongoing compliance focus areas
which have been identified by the compliance and audit committee.
Internal Audit
We have a compliance and audit department, which has an internal audit function. Our vice president of compliance and
audit services manages the combined compliance and audit department and meets with the audit and compliance committee of
our board of directors, at a minimum, on a quarterly basis to discuss audit results and provide an overview of the activities and
operation of our compliance program.
Available Information
We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, file periodic reports, proxy statements, and other information, including our Code of Conduct, with
the SEC. Such periodic reports, proxy statements, and other information are available on the SEC’s website at www.sec.gov.
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Our website address is www.selectmedicalholdings.com and can be used to access free of charge, through the investor
relations section, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the
SEC. The information on our website is not incorporated as a part of this annual report.
Executive Officers of the Registrant
The following table sets forth the names, ages and titles, as well as a brief account of the business experience, of each person
who was an executive officer of the Company as of February 21, 2019:
Name
Robert A. Ortenzio
Rocco A. Ortenzio
David S. Chernow
Martin F. Jackson
John A. Saich
Michael E. Tarvin
Scott A. Romberger
Age
Position
61 Executive Chairman and Co-Founder
86 Vice Chairman and Co-Founder
61
President and Chief Executive Officer
64 Executive Vice President and Chief Financial Officer
50 Executive Vice President and Chief Administrative Officer
58 Executive Vice President, General Counsel and Secretary
58
Senior Vice President, Controller and Chief Accounting Officer
Robert G. Breighner, Jr.
49 Vice President, Compliance and Audit Services and Corporate Compliance Officer
Robert A. Ortenzio has served as our Executive Chairman and Co-Founder since January 1, 2014. Mr. Ortenzio served as
our Chief Executive Officer from January 1, 2005 until December 31, 2013, and Mr. Ortenzio served as our President and Chief
Executive Officer from September 2001 to January 1, 2005. Mr. Ortenzio also served as our President and Chief Operating Officer
from February 1997 to September 2001. Mr. Ortenzio co-founded the Company and has served as a director since February 1997.
Mr. Ortenzio also serves on the board of directors of Concentra Group Holdings Parent. He was an Executive Vice President and
a director of Horizon/CMS Healthcare Corporation from July 1995 until July 1996. In 1986, Mr. Ortenzio co-founded Continental
Medical Systems, Inc., serving in a number of different capacities, including as a Senior Vice President from February 1986 until
April 1988, as Chief Operating Officer from April 1988 until July 1995, as President from May 1989 until August 1996, and as
Chief Executive Officer from July 1995 until August 1996. Before co-founding Continental Medical Systems, Inc., he was a Vice
President of Rehab Hospital Services Corporation. Mr. Ortenzio is the son of Rocco A. Ortenzio, our Vice Chairman and Co-
Founder.
Rocco A. Ortenzio has served as our Vice Chairman and Co-Founder since January 1, 2014. Mr. Ortenzio served as our
Executive Chairman from September 2001 until December 2013. From February 1997 to September 2001, Mr. Ortenzio served
as our Chief Executive Officer. Mr. Ortenzio co-founded the Company and has served as a director since February 1997. In 1986,
he co-founded Continental Medical Systems, Inc. and served as its Chairman and Chief Executive Officer until July 1995. In 1979,
Mr. Ortenzio founded Rehab Hospital Services Corporation and served as its Chairman and Chief Executive Officer until June
1986. In 1969, Mr. Ortenzio founded Rehab Corporation and served as its Chairman and Chief Executive Officer until 1974.
Mr. Ortenzio is the father of Robert A. Ortenzio, our Executive Chairman and Co-Founder.
David S. Chernow has served as our President and Chief Executive Officer since January 1, 2014. Mr. Chernow has served
as our President and previously held various executive officer titles since September 2010. Mr. Chernow served as a director of
the Company from January 2002 until February 2005 and from August 2005 until September 2010. Mr. Chernow also serves on
the board of directors of Concentra Group Holdings Parent. From May 2007 to February 2010, Mr. Chernow served as the President
and Chief Executive Officer of Oncure Medical Corp., one of the largest providers of free-standing radiation oncology care in the
United States. From July 2001 to June 2007, Mr. Chernow served as the President and Chief Executive Officer of JA Worldwide,
a nonprofit organization dedicated to the education of young people about business (formerly, Junior Achievement, Inc.). From
1999 to 2001, he was the President of the Physician Services Group at US Oncology, Inc. Mr. Chernow co-founded American
Oncology Resources in 1992 and served as its Chief Development Officer until the time of the merger with Physician Reliance
Network, Inc., which created US Oncology, Inc. in 1999.
Martin F. Jackson has served as our Executive Vice President and Chief Financial Officer since February 2007. He served
as our Senior Vice President and Chief Financial Officer from May 1999 to February 2007. Mr. Jackson also serves on the board
of directors of Concentra Group Holdings Parent. Mr. Jackson previously served as a Managing Director in the Health Care
Investment Banking Group for CIBC Oppenheimer from January 1997 to May 1999. Prior to that time, he served as Senior Vice
President, Health Care Finance with McDonald & Company Securities, Inc. from January 1994 to January 1997. Prior to 1994,
Mr. Jackson held senior financial positions with Van Kampen Merritt, Touche Ross, Honeywell and L’Nard Associates.
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John A. Saich has served as our Executive Vice President and Chief Administrative Officer since October 1, 2018. Prior to
his most recent promotion, he served as our Executive Vice President and Chief Human Resources Officer from December 2010
to September 2018. He served as our Senior Vice President, Human Resources from February 2007 to December 2010. He served
as our Vice President, Human Resources from November 1999 to January 2007. He joined the Company as Director, Human
Resources and HRIS in February 1998. Previously, Mr. Saich served as Director of Benefits and Human Resources for Integrated
Health Services in 1997 and as Director of Human Resources for Continental Medical Systems, Inc. from August 1993 to January
1997.
Michael E. Tarvin has served as our Executive Vice President, General Counsel and Secretary since February 2007. He
served as our Senior Vice President, General Counsel and Secretary from November 1999 to February 2007. He served as our
Vice President, General Counsel and Secretary from February 1997 to November 1999. He was Vice President—Senior Counsel
of Continental Medical Systems from February 1993 until February 1997. Prior to that time, he was Associate Counsel of Continental
Medical Systems from March 1992. Mr. Tarvin was an associate at the Philadelphia law firm of Drinker Biddle & Reath LLP from
September 1985 until March 1992.
Scott A. Romberger has served as our Senior Vice President and Controller since February 2007. He served as our Vice
President and Controller from February 1997 to February 2007. In addition, he has served as our Chief Accounting Officer since
December 2000. Prior to February 1997, he was Vice President—Controller of Continental Medical Systems from January 1991
until January 1997. Prior to that time, he served as Acting Corporate Controller and Assistant Controller of Continental Medical
Systems from June 1990 and December 1988, respectively. Mr. Romberger is a certified public accountant and was employed by
a national accounting firm from April 1985 until December 1988.
Robert G. Breighner, Jr. has served as our Vice President, Compliance and Audit Services since August 2003. He served as
our Director of Internal Audit from November 2001 to August 2003. Previously, Mr. Breighner was Director of Internal Audit for
Susquehanna Pfaltzgraff Co. from June 1997 until November 2001. Mr. Breighner held other positions with Susquehanna
Pfaltzgraff Co. from May 1991 until June 1997.
27
Item 1A. Risk Factors.
In addition to the factors discussed elsewhere in this Form 10-K, the following are important factors which could cause actual
results or events to differ materially from those contained in any forward-looking statements made by or on behalf of us.
Risks Related to Our Business
If there are changes in the rates or methods of government reimbursements for our services, our net operating revenues and
profitability could decline.
Approximately 30% of our net operating revenues for the year ended December 31, 2016, 30% of our net operating revenues
for the year ended December 31, 2017, and 27% of our net operating revenues for the year ended December 31, 2018, came from
the highly regulated federal Medicare program.
In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various
payment systems under the Medicare program. President Obama signed into law comprehensive reforms to the healthcare system,
including changes to the methods for, and amounts of, Medicare reimbursement. Additional reforms or other changes to these
payment systems, including modifications to the conditions on qualification for payment, bundling payments to cover both acute
and post-acute care, or the imposition of enrollment limitations on new providers, may be proposed or could be adopted, either
by Congress or CMS. If revised regulations are adopted, the availability, methods, and rates of Medicare reimbursements for
services of the type furnished at our facilities could change. For example, the rules and regulations related to patient criteria for
our critical illness recovery hospitals could become more stringent and reduce the number of patients we admit. Some of these
changes and proposed changes could adversely affect our business strategy, operations, and financial results. In addition, there
can be no assurance that any increases in Medicare reimbursement rates established by CMS will fully reflect increases in our
operating costs.
We conduct business in a heavily regulated industry, and changes in regulations, new interpretations of existing regulations,
or violations of regulations may result in increased costs or sanctions that reduce our net operating revenues and profitability.
The healthcare industry is subject to extensive federal, state, and local laws and regulations relating to: (i) facility and
professional licensure, including certificates of need; (ii) conduct of operations, including financial relationships among healthcare
providers, Medicare fraud and abuse, and physician self-referral; (iii) addition of facilities and services and enrollment of newly
developed facilities in the Medicare program; (iv) payment for services; and (v) safeguarding protected health information.
Both federal and state regulatory agencies inspect, survey, and audit our facilities to review our compliance with these laws
and regulations. While our facilities intend to comply with existing licensing, Medicare certification requirements, and accreditation
standards, there can be no assurance that these regulatory authorities will determine that all applicable requirements are fully met
at any given time. A determination by any of these regulatory authorities that a facility is not in compliance with these requirements
could lead to the imposition of requirements that the facility takes corrective action, assessment of fines and penalties, or loss of
licensure, Medicare certification, or accreditation. These consequences could have an adverse effect on our company.
In addition, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state
government agencies relating to the healthcare industry. The ongoing investigations relate to, among other things, various referral
practices, billing practices, and physician ownership. In the future, different interpretations or enforcement of these laws and
regulations could subject us to allegations of impropriety or illegality or could require us to make changes in our facilities,
equipment, personnel, services, and capital expenditure programs. These changes may increase our operating expenses and reduce
our operating revenues. If we fail to comply with these extensive laws and government regulations, we could become ineligible
to receive government program reimbursement, suffer civil or criminal penalties, or be required to make significant changes to
our operations. In addition, we could be forced to expend considerable resources responding to any related investigation or other
enforcement action.
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If our critical illness recovery hospitals fail to maintain their certifications as LTCHs or if our facilities operated as HIHs fail
to qualify as hospitals separate from their host hospitals, our net operating revenues and profitability may decline.
As of December 31, 2018, we operated 96 critical illness recovery hospitals, all of which are currently certified by Medicare
as LTCHs. LTCHs must meet certain conditions of participation to enroll in, and seek payment from, the Medicare program as an
LTCH, including, among other things, maintaining an average length of stay for Medicare patients in excess of 25 days. An LTCH
that fails to maintain this average length of stay for Medicare patients in excess of 25 days during a single cost reporting period
is generally allowed an opportunity to show that it meets the length of stay criteria during a subsequent cure period. If the LTCH
can show that it meets the length of stay criteria during this cure period, it will continue to be paid under the LTCH-PPS. If the
LTCH again fails to meet the average length of stay criteria during the cure period, it will be paid under the general acute care
IPPS at rates generally lower than the rates under the LTCH-PPS.
Similarly, our HIHs must meet conditions of participation in the Medicare program, which include additional criteria
establishing separateness from the hospital with which the HIH shares space. If our critical illness recovery hospitals fail to meet
or maintain the standards for certification as LTCHs, they will receive payment under the general acute care hospitals IPPS which
is generally lower than payment under the system applicable to LTCHs. Payments at rates applicable to general acute care hospitals
would result in our hospitals receiving significantly less Medicare reimbursement than they currently receive for their patient
services.
Decreases in Medicare reimbursement rates received by our outpatient rehabilitation clinics may reduce our future net operating
revenues and profitability.
Our outpatient rehabilitation clinics receive payments from the Medicare program under a fee schedule. The Medicare Access
and CHIP Reauthorization Act of 2015 requires that payments under the fee schedule be adjusted starting in 2019 based on
performance in a MIPS and, beginning in 2020, incentives for participation in alternative payment models. The specifics of the
MIPS and incentives for participation in alternative payment models will be subject to future notice and comment rule-making.
It is unclear what impact, if any, the MIPS and incentives for participation in alternative payment models will have on our business
and operating results, but any resulting decrease in payment may reduce our future net operating revenues and profitability.
The nature of the markets that Concentra serves may constrain its ability to raise prices at rates sufficient to keep pace with
the inflation of its costs.
Rates of reimbursement for work-related injury or illness visits in Concentra’s occupational health services business are
established through a legislative or regulatory process within each state that Concentra serves. Currently, 37 states in which
Concentra has operations have fee schedules pursuant to which all healthcare providers are uniformly reimbursed. The fee schedules
are determined by each state and generally prescribe the maximum amounts that may be reimbursed for a designated procedure.
In the states without fee schedules, healthcare providers are generally reimbursed based on usual, customary and reasonable rates
charged in the particular state in which the services are provided. Given that Concentra does not control these processes, it may
be subject to financial risks if individual jurisdictions reduce rates or do not routinely raise rates of reimbursement in a manner
that keeps pace with the inflation of Concentra’s costs of service.
In Concentra’s veteran’s healthcare business, reimbursement rates are generally set according to the capitated monthly rate
based on the number of then enrolled patients at that CBOC. Evolving legislative and regulatory changes aimed at improving
veteran’s access to care in the wake of Department of Veterans Affairs scandals (none of which involved Concentra’s CBOCs)
could result in fewer patients enrolling in CBOCs. Federal legislation that permits certain veterans to receive their healthcare
outside of the Department of Veterans Affairs facilities, for example, may reduce demand for services at some of Concentra’s
CBOCs. Moreover, changes in the methods, manner or amounts of compensation payable for Concentra’s services, including,
amounts reimbursable to the CBOCs under its agreements with the Department of Veterans Affairs, due to legislative or other
changes or shifting budget priorities could result in lower reimbursement for services provided at Concentra’s CBOCs. Concentra
may receive lower payments from the Veterans Health Administration if fewer eligible veterans are considered to live within the
catchments of its CBOCs. These trends could have an adverse effect on our financial condition and results of operations.
29
If our rehabilitation hospitals fail to comply with the 60% Rule or admissions to IRFs are limited due to changes to the diagnosis
codes on the presumptive compliance list, our net operating revenues and profitability may decline.
As of December 31, 2018, we operated 26 rehabilitation hospitals, all of which were certified as Medicare providers and
operating as IRFs. Our rehabilitation hospitals must meet certain conditions of participation to enroll in, and seek payment from,
the Medicare program as an IRF. Among other things, at least 60% of the IRF’s total inpatient population must require treatment
for one or more of 13 conditions specified by regulation. This requirement is now commonly referred to as the “60% Rule.”
Compliance with the 60% Rule is demonstrated through a two step process. The first step is the “presumptive” method, in which
patient diagnosis codes are compared to a “presumptive compliance” list. IRFs that fail to demonstrate compliance with the 60%
Rule using this presumptive test may demonstrate compliance through a second step involving an audit of the facility’s medical
records to assess compliance.
If an IRF does not demonstrate compliance with the 60% Rule by either the presumptive method or through a review of
medical records, then the facility’s classification as an IRF may be terminated at the start of its next cost reporting period causing
the facility to be paid as a general acute care hospital under IPPS. If our rehabilitation hospitals fail to demonstrate compliance
with the 60% Rule through either method and are classified as general acute care hospitals, our net operating revenue and profitability
may be adversely affected.
As a result of post-payment reviews of claims we submit to Medicare for our services, we may incur additional costs and may
be required to repay amounts already paid to us.
We are subject to regular post-payment inquiries, investigations, and audits of the claims we submit to Medicare for payment
for our services. These post-payment reviews include medical necessity reviews for Medicare patients admitted to LTCHs and
IRFs, and audits of Medicare claims under the Recovery Audit Contractor program. These post-payment reviews may require us
to incur additional costs to respond to requests for records and to pursue the reversal of payment denials, and ultimately may
require us to refund amounts paid to us by Medicare that are determined to have been overpaid.
Most of our critical illness recovery hospitals are subject to short-term leases, and the loss of multiple leases close in time could
materially and adversely affect our business, financial condition, and results of operations.
We lease most of our critical illness recovery hospitals under short-term leases with terms of less than ten years. These leases
often do not have favorable renewal options and generally cannot be renewed or extended without the written consent of the
landlords thereunder. If we cannot renew or extend a significant number of our existing leases, or if the terms for lease renewal
or extension offered by landlords on a significant number of leases are unacceptable to us, then the loss of multiple leases close
in time could materially and adversely affect our business, financial condition, and results of operations.
Our facilities are subject to extensive federal and state laws and regulations relating to the privacy of individually identifiable
information.
HIPAA required the United States Department of Health and Human Services to adopt standards to protect the privacy and
security of individually identifiable health information. The department released final regulations containing privacy standards in
December 2000 and published revisions to the final regulations in August 2002. The privacy regulations extensively regulate the
use and disclosure of individually identifiable health information. The regulations also provide patients with significant new rights
related to understanding and controlling how their health information is used or disclosed. The security regulations require
healthcare providers to implement administrative, physical and technical practices to protect the security of individually identifiable
health information that is maintained or transmitted electronically. HITECH, which was signed into law in February 2009, enhanced
the privacy, security, and enforcement provisions of HIPAA by, among other things, establishing security breach notification
requirements, allowing enforcement of HIPAA by state attorneys general, and increasing penalties for HIPAA violations. Violations
of HIPAA or HITECH could result in civil or criminal penalties. For example, HITECH permits HHS to conduct audits of HIPAA
compliance and impose penalties even if we did not know or reasonably could not have known about the violation and increases
civil monetary penalty amounts up to $50,000 per violation with a maximum of $1.5 million in a calendar year for violations of
the same requirement.
In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient and consumer privacy
concerns, including unauthorized access, or theft of patient’s identifiable health information. State statutes and regulations vary
from state to state. Lawsuits, including class actions and action by state attorneys general, directed at companies that have
experienced a privacy or security breach also can occur.
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In the conduct of our business, we process, maintain, and transmit sensitive data, including our patient’s individually
identifiable health information. We have developed a comprehensive set of policies and procedures in our efforts to comply with
HIPAA and other privacy laws. Our compliance officer, privacy officer, and information security officer are responsible for
implementing and monitoring compliance with our privacy and security policies and procedures at our facilities. We believe that
the cost of our compliance with HIPAA and other federal and state privacy laws will not have a material adverse effect on our
business, financial condition, results of operations, or cash flows. However, there can be no assurance that a breach of privacy or
security will not occur. If there is a breach, we may be subject to various lawsuits, penalties and damages and may be required to
incur costs to mitigate the impact of the breach on affected individuals.
We may be adversely affected by a security breach of our, or our third-party vendors’, information technology systems, such
as a cyber attack, which may cause a violation of HIPAA or HITECH and subject us to potential legal and reputational harm.
In the normal course of business, our information technology systems hold sensitive patient information including patient
demographic data, eligibility for various medical plans including Medicare and Medicaid, and protected health information, which
is subject to HIPAA and HITECH. Additionally, we utilize those same systems to perform our day-to-day activities, such as
receiving referrals, assigning medical teams to patients, documenting medical information, maintaining an accurate record of all
transactions, processing payments, and maintaining our employee’s personal information. We also contract with third-party vendors
to maintain and store our patient’s individually identifiable health information. Numerous state and federal laws and regulations
address privacy and information security concerns resulting from our access to our patient’s and employee’s personal information.
Our information technology systems and those of our vendors that process, maintain, and transmit such data are subject to
computer viruses, cyber attacks, or breaches. We adhere to policies and procedures designed to ensure compliance with HIPAA
and other privacy and information security laws and require our third-party vendors to do so as well. Failure to maintain the security
and functionality of our information systems and related software, or to defend a cybersecurity attack or other attempt to gain
unauthorized access to our or or third-party’s systems, facilities, or patient health information could expose us to a number of
adverse consequences, including but not limited to disruptions in our operations, regulatory and other civil and criminal penalties,
reputational harm, investigations and enforcement actions (including, but not limited to, those arising from the SEC, Federal Trade
Commission, the OIG or state attorneys general), fines, litigation with those affected by the data breach, loss of customers, disputes
with payors, and increased operating expense, which either individually or in the aggregate could have a material adverse effect
on our business, financial position, results of operations, and liquidity.
Furthermore, while our information technology systems, and those of our third-party vendors, are maintained with safeguards
protecting against cyber attacks, including passive intrusion protection, firewalls, and virus detection software, these safeguards
do not ensure that a significant cyber attack could not occur. A cyber attack that bypasses our information technology security
systems, or those of our third-party vendors, could cause the loss of protected health information, or other data subject to privacy
laws, the loss of proprietary business information, or a material disruption to our or a third-party vendor’s information technology
business systems resulting in a material adverse effect on our business, financial condition, results of operations, or cash flows.
In addition, our future results could be adversely affected due to the theft, destruction, loss, misappropriation, or release of protected
health information, other confidential data or proprietary business information, operational or business delays resulting from the
disruption of information technology systems and subsequent clean-up and mitigation activities, negative publicity resulting in
reputation or brand damage with clients, members, or industry peers, or regulatory action taken as a result of such incident. We
provide our employees training and regular reminders on important measures they can take to prevent breaches. We routinely
identify attempts to gain unauthorized access to our systems. However, given the rapidly evolving nature and proliferation of cyber
threats, there can be no assurance our training and network security measures or other controls will detect, prevent, or remediate
security or data breaches in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems
and operations. For example, it has been widely reported that many well-organized international interests, in certain cases with
the backing of sovereign governments, are targeting the theft of patient information through the use of advance persistent threats.
Similarly, in recent years, several hospitals have reported being the victim of ransomware attacks in which they lost access to their
systems, including clinical systems, during the course of the attacks. We are likely to face attempted attacks in the future.
Accordingly, we may be vulnerable to losses associated with the improper functioning, security breach, or unavailability of our
information systems as well as any systems used in acquired operations.
Our acquisitions require transitions and integration of various information technology systems, and we regularly upgrade
and expand our information technology systems’ capabilities. If we experience difficulties with the transition and integration of
these systems or are unable to implement, maintain, or expand our systems properly, we could suffer from, among other things,
operational disruptions, regulatory problems, working capital disruptions, and increases in administrative expenses. While we
make significant efforts to address any information security issues and vulnerabilities with respect to the companies we acquire,
we may still inherit risks of security breaches or other compromises when we integrate these companies within our business.
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Quality reporting requirements may negatively impact Medicare reimbursement.
The IMPACT Act requires the submission of standardized data by certain healthcare providers. Specifically,
the IMPACT Act requires, among other significant activities, the reporting of standardized patient assessment data with regard to
quality measures, resource use, and other measures. Failure to report data as required will subject providers to a 2% reduction in
market basket prices then in effect. Additionally, reporting activities associated with the IMPACT Act are anticipated to be quite
burdensome. CMS proposes to require hospitals to have a discharge planning process that focuses on patients’ goals and preferences
and on preparing them and, as appropriate, their caregivers, to be active partners in their post-discharge care. The adoption of
these and additional quality reporting measures for our hospitals to track and report will require additional time and expense and
could affect reimbursement in the future. In healthcare generally, the burdens associated with collecting, recording, and reporting
quality data are increasing.
There can be no assurance that all of our agencies will continue to meet quality reporting requirements in the future which
may result in one or more of our agencies seeing a reduction in its Medicare reimbursements. Regardless, we, like other healthcare
providers, are likely to incur additional expenses in an effort to comply with additional and changing quality reporting requirements.
We may be adversely affected by negative publicity which can result in increased governmental and regulatory scrutiny and
possibly adverse regulatory changes.
Negative press coverage, including about the industries in which we currently operate, can result in increased governmental
and regulatory scrutiny and possibly adverse regulatory changes. Adverse publicity and increased governmental scrutiny can have
a negative impact on our reputation with referral sources and patients and on the morale and performance of our employees, both
of which could adversely affect our businesses and results of operations.
Current and future acquisitions may use significant resources, may be unsuccessful, and could expose us to unforeseen
liabilities.
As part of our growth strategy, we may pursue acquisitions of critical illness recovery hospitals, rehabilitation hospitals,
outpatient rehabilitation clinics, and other related healthcare facilities and services. These acquisitions, including the acquisition
of U.S. HealthWorks by Concentra, may involve significant cash expenditures, debt incurrence, additional operating losses and
expenses, and compliance risks that could have a material adverse effect on our financial condition and results of operations.
We may not be able to successfully integrate our acquired businesses into ours, and therefore, we may not be able to realize
the intended benefits from an acquisition. If we fail to successfully integrate acquisitions, including that of U.S. HealthWorks, our
financial condition and results of operations may be materially adversely affected. These acquisitions could result in difficulties
integrating acquired operations, technologies, and personnel into our business. Such difficulties may divert significant financial,
operational, and managerial resources from our existing operations and make it more difficult to achieve our operating and strategic
objectives. We may fail to retain employees or patients acquired through these acquisitions, which may negatively impact the
integration efforts. These acquisitions, including the acquisition of U.S. HealthWorks by Concentra, could also have a negative
impact on our results of operations if it is subsequently determined that goodwill or other acquired intangible assets are impaired,
thus resulting in an impairment charge in a future period.
In addition, these acquisitions involve risks that the acquired businesses will not perform in accordance with expectations;
that we may become liable for unforeseen financial or business liabilities of the acquired businesses, including liabilities for failure
to comply with healthcare regulations; that the expected synergies associated with acquisitions will not be achieved; and that
business judgments concerning the value, strengths, and weaknesses of businesses acquired will prove incorrect, which could have
a material adverse effect on our financial condition and results of operations.
Risks associated with our potential international operations.
We are expanding our operations into other countries. International operations are subject to risks that may materially
adversely affect our business, results of operations, and financial condition. The risks that our potential international operations
would be subject to include, among other things: difficulties and costs relating to staffing and managing foreign operations;
fluctuations in the value of foreign currencies; repatriation of cash from our foreign operations to the United States; foreign
countries may impose additional withholding taxes or otherwise tax our foreign income; separate operating and financial systems;
disaster recovery; and unexpected regulatory, economic, and political changes in foreign markets. In addition to the foregoing,
our potential international operations will face risks associated with complying with laws governing our foreign business operations,
including the United States Foreign Corrupt Practices Act and applicable regulatory requirements.
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Future joint ventures may use significant resources, may be unsuccessful, and could expose us to unforeseen liabilities.
As part of our growth strategy, we have partnered and may partner with large healthcare systems to provide post-acute care
services. These joint ventures have included and may involve significant cash expenditures, debt incurrence, additional operating
losses and expenses, and compliance risks that could have a material adverse effect on our financial condition and results of
operations.
A joint venture involves the combining of corporate cultures and mission. As a result, we may not be able to successfully
operate a joint venture, and therefore, we may not be able to realize the intended benefits. If we fail to successfully execute a joint
venture relationship, our financial condition and results of operations may be materially adversely affected. A new joint venture
could result in difficulties in combining operations, technologies, and personnel. Such difficulties may divert significant financial,
operational, and managerial resources from our existing operations and make it more difficult to achieve our operating and strategic
objectives. We may fail to retain employees or patients as a result of the integration efforts.
A joint venture is operated through a board of directors that contains representatives of Select and other parties to the joint
venture. We may not control the board or some actions of the board may require supermajority votes. As a result, the joint venture
may elect certain actions that could have adverse effects on our financial condition and results of operations.
If we fail to compete effectively with other hospitals, clinics, occupational health centers, and healthcare providers in the local
areas we serve, our net operating revenues and profitability may decline.
The healthcare business is highly competitive, and we compete with other hospitals, rehabilitation clinics, occupational
health centers, and other healthcare providers for patients. If we are unable to compete effectively in the critical illness recovery,
rehabilitation hospital, outpatient rehabilitation, and occupational health services businesses, our ability to retain customers and
physicians, or maintain or increase our revenue growth, price flexibility, control over medical cost trends, and marketing expenses
may be compromised and our net operating revenues and profitability may decline.
Many of our critical illness recovery hospitals and our rehabilitation hospitals operate in geographic areas where we compete
with at least one other facility that provides similar services.
Our outpatient rehabilitation clinics face competition from a variety of local and national outpatient rehabilitation providers,
including physician-owned physical therapy clinics, dedicated locally owned and managed outpatient rehabilitation clinics, and
hospital or university owned or affiliated ventures, as well as national and regional providers in select areas. Other competing
outpatient rehabilitation clinics in local areas we serve may have greater name recognition and longer operating histories than our
clinics. The managers of these competing clinics may also have stronger relationships with physicians in their communities, which
could give them a competitive advantage for patient referrals. Because the barriers to entry are not substantial and current customers
have the flexibility to move easily to new healthcare service providers, we believe that new outpatient physical therapy competitors
can emerge relatively quickly.
Concentra’s primary competitors, including those of U.S. HealthWorks, have typically been independent physicians, hospital
emergency departments, and hospital-owned or hospital-affiliated medical facilities. Because the barriers to entry in Concentra’s
geographic markets are not substantial and its current customers have the flexibility to move easily to new healthcare service
providers, new competitors to Concentra can emerge relatively quickly. The markets for Concentra’s consumer health and veteran’s
healthcare businesses are also fragmented and competitive. If Concentra’s competitors are better able to attract patients or expand
services at their facilities than Concentra is, Concentra may experience an overall decline in revenue. Similarly, competitive pricing
pressures from our competitors could cause Concentra to lose existing or future CBOC contracts with the Department of Veterans
Affairs, which may also cause Concentra to experience an overall decline in revenue.
Future cost containment initiatives undertaken by private third-party payors may limit our future net operating revenues and
profitability.
Initiatives undertaken by major insurers and managed care companies to contain healthcare costs affect our profitability.
These payors attempt to control healthcare costs by contracting with hospitals and other healthcare providers to obtain services
on a discounted basis. We believe that this trend may continue and may limit reimbursements for healthcare services. If insurers
or managed care companies from whom we receive substantial payments reduce the amounts they pay for services, our profit
margins may decline, or we may lose patients if we choose not to renew our contracts with these insurers at lower rates.
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If we fail to maintain established relationships with the physicians in the areas we serve, our net operating revenues may
decrease.
Our success is partially dependent upon the admissions and referral practices of the physicians in the communities our critical
illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation clinics serve, and our ability to maintain good
relations with these physicians. Physicians referring patients to our hospitals and clinics are generally not our employees and, in
many of the local areas that we serve, most physicians have admitting privileges at other hospitals and are free to refer their patients
to other providers. If we are unable to successfully cultivate and maintain strong relationships with these physicians, our hospitals’
admissions and our facilities’ and clinics’ businesses may decrease, and our net operating revenues may decline.
We could experience significant increases to our operating costs due to shortages of healthcare professionals or union activity.
Our critical illness recovery hospitals and our rehabilitation hospitals are highly dependent on nurses, our outpatient
rehabilitation division is highly dependent on therapists for patient care, and Concentra is highly dependent upon the ability of its
affiliated professional groups to recruit and retain qualified physicians and other licensed providers. The market for qualified
healthcare professionals is highly competitive. We have sometimes experienced difficulties in attracting and retaining qualified
healthcare personnel. We cannot assure you we will be able to attract and retain qualified healthcare professionals in the future.
Additionally, the cost of attracting and retaining qualified healthcare personnel may be higher than we anticipate, and as a result,
our profitability could decline.
In addition, United States healthcare providers are continuing to see an increase in the amount of union activity. Though we
cannot predict the degree to which we will be affected by future union activity, there may be continuing legislative proposals that
could result in increased union activity. We could experience an increase in labor and other costs from such union activity.
Our business operations could be significantly disrupted if we lose key members of our management team.
Our success depends to a significant degree upon the continued contributions of our senior officers and other key employees,
and our ability to retain and motivate these individuals. We currently have employment agreements in place with three executive
officers and change in control agreements and/or non-competition agreements with several other officers. Many of these individuals
also have significant equity ownership in our company. We do not maintain any key life insurance policies for any of our employees.
The loss of the services of certain of these individuals could disrupt significant aspects of our business, could prevent us from
successfully executing our business strategy, and could have a material adverse effect on our results of operations.
In conducting our business, we are required to comply with applicable laws regarding fee-splitting and the corporate practice
of medicine.
Some states prohibit the “corporate practice of medicine” that restricts business corporations from practicing medicine
through the direct employment of physicians or from exercising control over medical decisions by physicians. Some states similarly
prohibit the “corporate practice of therapy.” The laws relating to corporate practice vary from state to state and are not fully
developed in each state in which we have facilities. Typically, however, professional corporations owned and controlled by licensed
professionals are exempt from corporate practice restrictions and may employ physicians or therapists to furnish professional
services. Also, in some states, hospitals are permitted to employ physicians.
Some states also prohibit entities from engaging in certain financial arrangements, such as fee-splitting, with physicians or
therapists. The laws relating to fee-splitting also vary from state to state and are not fully developed. Generally, these laws restrict
business arrangements that involve a physician or therapist sharing medical fees with a referral source, but in some states, these
laws have been interpreted to extend to management agreements between physicians or therapists and business entities under some
circumstances.
We believe that the Company’s current and planned activities do not constitute fee-splitting or the unlawful corporate practice
of medicine as contemplated by these state laws. However, there can be no assurance that future interpretations of such laws will
not require structural and organizational modification of our existing relationships with the practices. If a court or regulatory body
determines that we have violated these laws or if new laws are introduced that would render our arrangements illegal, we could
be subject to civil or criminal penalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or
we could be required to restructure our contractual arrangements with our affiliated physicians and other licensed providers.
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If the frequency of workplace injuries and illnesses continues to decline, Concentra’s results may be negatively affected.
Approximately 58% of Concentra’s revenue in 2018 was generated from the treatment of workers’ compensation claims.
In the past decade, the number of workers’ compensation claims has decreased, which Concentra primarily attributes to
improvements in workplace safety, improved risk management by employers, and changes in the type and composition of jobs.
During the economic downturn, the number of employees with workers’ compensation insurance substantially decreased. Although
the number of covered employees has increased more in recent years as the employment rate has increased, adverse economic
conditions can cause the number of covered employees to decline which can cause further declines in workers’ compensation
claims. In addition, because of the greater access to health insurance and the fact that the United States economy has continued
to shift from a manufacturing-based to a service-based economy along with general improvements in workplace safety, workers
are generally healthier and less prone to work injuries. Increases in employer-sponsored wellness and health promotion programs,
spurred in part by the ACA, have led to fitter and healthier employees who may be less likely to injure themselves on the job.
Concentra’s business model is based, in part, on its ability to expand its relative share of the market for the treatment of claims
for workplace injuries and illnesses. If workplace injuries and illnesses decline at a greater rate than the increase in total employment,
or if total employment declines at a greater rate than the increase in incident rates, the number of claims in the workers’ compensation
market will decrease and may adversely affect Concentra’s business.
If Concentra loses several significant employer customers, its results may be adversely affected.
Concentra’s results may decline if it loses several significant employer customers. One or more of Concentra’s significant
employer customers could be acquired. Additionally, Concentra could lose significant employer customers due to competitive
pricing pressures or other reasons. The loss of several significant employer customers could cause a material decline in Concentra’s
profitability and operating performance.
Significant legal actions could subject us to substantial uninsured liabilities.
Physicians, hospitals, and other healthcare providers have become subject to an increasing number of legal actions alleging
malpractice, product liability, or related legal theories. Many of these actions involve large claims and significant defense costs.
We are also subject to lawsuits under federal and state whistleblower statutes designed to combat fraud and abuse in the healthcare
industry. These whistleblower lawsuits are not covered by insurance and can involve significant monetary damages and award
bounties to private plaintiffs who successfully bring the suits. See “Legal Proceedings” and Note 17 in our audited consolidated
financial statements.
We currently maintain professional malpractice liability insurance and general liability insurance coverages through a number
of different programs that are dependent upon such factors as the state where we are operating and whether the operations are
wholly owned or are operated through a joint venture. For our wholly owned operations, we currently maintain insurance coverages
under a combination of policies with a total annual aggregate limit of up to $40.0 million. Our insurance for the professional
liability coverage is written on a “claims-made” basis, and our commercial general liability coverage is maintained on an
“occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For our joint venture operations, we
have numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under
these programs ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of
these programs has either a deductible or self-insured retention limit. We review our insurance program annually and may make
adjustments to the amount of insurance coverage and self-insured retentions in future years. In addition, our insurance coverage
does not generally cover punitive damages and may not cover all claims against us. See “Business—Government Regulations—
Other Healthcare Regulations.”
Concentration of ownership among our existing executives and directors may prevent new investors from influencing significant
corporate decisions.
Our executives and directors, beneficially own, in the aggregate, approximately 19.5% of Holdings’ outstanding common
stock as of February 1, 2019. As a result, these stockholders have significant control over our management and policies and are
able to exercise influence over all matters requiring stockholder approval, including the election of directors, amendment of our
certificate of incorporation, and approval of significant corporate transactions. The directors elected by these stockholders are able
to make decisions affecting our capital structure, including decisions to issue additional capital stock, implement stock repurchase
programs, and incur indebtedness. This influence may have the effect of deterring hostile takeovers, delaying or preventing changes
in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem
to be in their best interest.
35
Risks Related to Our Capital Structure
If WCAS and the other members of Concentra Group Holdings Parent or Dignity Health exercise their Put Right, it may have
an adverse effect on our liquidity. Additionally, we may not have adequate funds to pay amounts due in connection with the
Put Right, if exercised, in which case we would be required to issue Holdings’ common stock to purchase interests of Concentra
Group Holdings Parent and our stockholders’ ownership interest will be diluted.
Pursuant to the Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, WCAS
and the other members of Concentra Group Holdings Parent and Dignity Health have separate put rights (each, a “Put Right”)
with respect to their equity interests in Concentra Group Holdings Parent. If a Put Right is exercised by WCAS or Dignity Health,
Select will be obligated to purchase up to 331/3% of the equity interests of Concentra Group Holdings Parent that WCAS or
Dignity Health, respectively, owned as of February 1, 2018, at a purchase price based on a valuation of Concentra Group Holdings
Parent performed by an investment bank to be agreed between Select and one of WCAS or Dignity Health, which valuation will
be based on certain precedent transactions using multiples of EBITDA (as defined in the Amended and Restated Limited Liability
Company Agreement of Concentra Group Holdings Parent) and capped at an agreed upon multiple of EBITDA. Select has the
right to elect to pay the purchase price in cash or in shares of Holdings’ common stock. WCAS and Dignity Health may first
exercise their respective Put Right during a sixty-day period following the second anniversary of the date of the Amended and
Restated LLC Agreement in 2020, and then may exercise their respective Put Right again annually during a sixty-day period in
each calendar year thereafter. If WCAS exercises its Put Right, the other members of Concentra Group Holdings Parent, other
than Dignity Health, may elect to sell to Select, on the same terms as WCAS, a percentage of their equity interests of Concentra
Group Holdings Parent that such member owned as of the date of the Amended and Restated LLC Agreement, up to but not
exceeding the percentage of equity interests owned by WCAS as of the date of the Amended and Restated LLC Agreement that
WCAS has determined to sell to Select in the exercise of its Put Right.
Furthermore, WCAS, Dignity Health, and the other members of Concentra Group Holdings Parent have a put right with
respect to their equity interest in Concentra Group Holdings Parent that may only be exercised in the event Holdings or Select
experiences a change of control that has not been previously approved by WCAS and Dignity Health, and which results in change
in the senior management of Select (an “SEM COC Put Right”). If an SEM COC Put Right is exercised by WCAS, Select will be
obligated to purchase all (but not less than all) of the equity interests of WCAS and the other members of Concentra Group Holdings
Parent (other than Dignity Health) offered by such members at a purchase price based on a valuation of Concentra Group Holdings
Parent performed by an investment bank to be agreed between Select and one of WCAS or Dignity Health, which valuation will
be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA. Similarly,
if an SEM COC Put Right is exercised by Dignity Health, Select will be obligated to purchase all (but not less than all) of the
equity interests of Dignity Health at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an
investment bank to be agreed between Select and one of WCAS or Dignity Health, which valuation will be based on certain
precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA.
We may not have sufficient funds, borrowing capacity, or other capital resources available to pay for the interests of Concentra
Group Holdings Parent in cash if WCAS, Dignity Health, and the other members of Concentra Group Holdings Parent exercise
the Put Right or the SEM COC Put Right, or may be prohibited from doing so under the terms of our debt agreements. Such lack
of available funds upon the exercising of the Put Right or the SEM COC Put Right would force us to issue stock at a time we
might not otherwise desire to do so in order to purchase the interests of Concentra Group Holdings Parent. To the extent that the
interests of Concentra Group Holdings Parent are purchased by issuing shares of our common stock, the increase in the number
of shares of our common stock issued and outstanding may depress the price of our common stock and our stockholders will
experience dilution in their respective percentage ownership in us. In addition, shares issued to purchase the interests in Concentra
Group Holdings Parent will be valued at the twenty-one trading day volume-weighted average sales price of such shares for the
period beginning ten trading days immediately preceding the first public announcement of the Put Right or the SEM COC Put
Right being exercised and ending ten trading days immediately following such announcement. Because the value of the common
stock issued to purchase the interests in Concentra Group Holdings Parent is, in part, determined by the sales price of our common
stock following the announcement that the Put Right or the SEM COC Put Right is being exercised, which may cause the sales
price of our common stock to decline, the amount of common stock we may have to issue to purchase the interests in Concentra
Group Holdings Parent may increase, resulting in further dilution to our existing stockholders.
36
Our substantial indebtedness may limit the amount of cash flow available to invest in the ongoing needs of our business.
We have a substantial amount of indebtedness. As of December 31, 2018, Select had approximately $1,892.7 million of
total indebtedness, and Concentra had approximately $1,400.7 million of total indebtedness. As of December 31, 2018, our total
indebtedness was $3,293.4 million. Our indebtedness could have important consequences to you. For example, it:
•
•
•
requires us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness,
reducing the availability of our cash flow to fund working capital, capital expenditures, development activity,
acquisitions, and other general corporate purposes;
increases our vulnerability to adverse general economic or industry conditions;
limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate;
• makes us more vulnerable to increases in interest rates, as borrowings under our senior secured credit facilities are at
variable rates;
•
•
limits our ability to obtain additional financing in the future for working capital or other purposes; and
places us at a competitive disadvantage compared to our competitors that have less indebtedness.
Any of these consequences could have a material adverse effect on our business, financial condition, results of operations,
prospects, and ability to satisfy our obligations under our indebtedness. In addition, there would be a material adverse effect on
our business, financial condition, results of operations, and cash flows if we were unable to service our indebtedness or obtain
additional financing, as needed.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.”
The Select credit facilities and the indenture governing Select’s 6.375% senior notes require Select to comply with certain
financial covenants and obligations, the default of which may result in the acceleration of certain of Select’s indebtedness.
In the case of an event of default under the agreements governing the Select credit facilities (as defined below), the lenders
under such agreements could elect to declare all amounts borrowed, together with accrued and unpaid interest and other fees, to
be due and payable. If Select is unable to obtain a waiver from the requisite lenders under such circumstances, these lenders could
exercise their rights, then Select’s financial condition and results of operations could be adversely affected, and Select could
become bankrupt or insolvent.
The Select credit facilities require Select to maintain a leverage ratio (based upon the ratio of indebtedness to consolidated
EBITDA as defined in the agreements governing the Select credit facilities), which is tested quarterly. Failure to comply with
these covenants would result in an event of default under the Select credit facilities and, absent a waiver or an amendment from
the lenders, preclude Select from making further borrowings under its revolving facility and permit the lenders to accelerate all
outstanding borrowings under the Select credit facilities.
As of December 31, 2018, Select was required to maintain its leverage ratio (its ratio of total indebtedness to consolidated
EBITDA for the prior four consecutive fiscal quarters) at less than 6.25 to 1.00. At December 31, 2018, Select’s leverage ratio
was 4.64 to 1.00.
While Select has never defaulted on compliance with any of its financial covenants, Select’s ability to comply with these
ratios in the future may be affected by events beyond its control. Inability to comply with the required financial covenants could
result in a default under the Select credit facilities. In the event of any default under Select’s credit facilities, the lenders could
elect to terminate borrowing commitments and declare all borrowings outstanding, together with accrued and unpaid interest and
other fees, to be immediately due and payable. In the event of any default under Select’s indenture, the trustee or holders of 25%
of the notes could declare all outstanding 6.375% senior notes immediately due and payable.
37
The Concentra credit facilities require Concentra to comply with certain financial covenants and obligations, the default of
which may result in the acceleration of certain of Concentra’s indebtedness.
In the case of an event of default under the agreements governing the Concentra credit facilities (as defined below), which
is nonrecourse to Select, the lenders under such agreements could elect to declare all amounts borrowed, together with accrued
and unpaid interest and other fees, to be due and payable. If Concentra is unable to obtain a waiver from these lenders under such
circumstances, the lenders could exercise their rights, then Concentra’s financial condition and results of operations could be
adversely affected, and Concentra could become bankrupt or insolvent.
The Concentra first lien credit agreement (as defined below) requires Concentra to maintain a leverage ratio (based upon
the ratio of indebtedness for money borrowed to consolidated EBITDA) of 5.75 to 1.00, which is tested quarterly, but only if
Revolving Exposure (as defined in the Concentra credit facilities) exceeds 30% of Revolving Commitments (as defined in the
Concentra credit facilities) on such day. Failure to comply with this covenant would result in an event of default under the Concentra
revolving facility (as defined below) only and, absent a waiver or an amendment from the lenders, preclude Concentra from making
further borrowings under the Concentra revolving facility and permit the lenders to accelerate all outstanding borrowings under
the Concentra revolving facility. Upon such acceleration, Concentra’s failure to comply with the financial covenant would result
in an Event of Default (as defined in the Concentra credit facilities) with respect to the Concentra first lien term loan (as defined
below). Upon the acceleration of outstanding borrowings under the Concentra revolving facility and the Concentra first lien term
loan, an Event of Default would result with respect to the Concentra second lien credit agreement.
The Concentra credit facilities also contain a number of affirmative and restrictive covenants, including limitations on
mergers, consolidations, and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions;
and dividends and restricted payments. The Concentra credit facilities contain events of default for non-payment of principal and
interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default
that would be triggered by a change of control.
While Concentra has never defaulted on compliance with any of its financial covenants, Concentra’s ability to comply with
these ratios in the future may be affected by events beyond our control. Inability to comply with the required financial covenants
could result in a default under the Concentra credit facilities. In the event of any default under the Concentra credit facilities, the
lenders could elect to terminate borrowing commitments and declare all borrowings outstanding, together with accrued and unpaid
interest and other fees, to be immediately due and payable.
Payment of interest on, and repayment of principal of, our indebtedness is dependent in part on cash flow generated by our
subsidiaries.
Payment of interest on, and repayment of, principal of our indebtedness will be dependent in part upon cash flow generated
by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment, or otherwise. Our subsidiaries
may not be able to, or be permitted to, make distributions to enable us to make payments in respect of our indebtedness. For
example, as a general matter, Concentra is restricted from paying dividends under the Concentra credit facilities and therefore we
cannot rely on Concentra’s cash flow to repay Select’s indebtedness. Each of our subsidiaries is a distinct legal entity and, under
certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event
that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on
our indebtedness. In addition, any payment of interest, dividends, distributions, loans, or advances by our subsidiaries to us could
be subject to restrictions on dividends or repatriation of distributions under applicable local law, monetary transfer restrictions,
and foreign currency exchange regulations in the jurisdictions in which the subsidiaries operate or under arrangements with local
partners. Furthermore, the ability of our subsidiaries to make such payments of interest, dividends, distributions, loans, or advances
may be contested by taxing authorities in the relevant jurisdictions.
Despite our substantial level of indebtedness, we and our subsidiaries may be able to incur additional indebtedness. This could
further exacerbate the risks described above.
We and our subsidiaries may be able to incur additional indebtedness in the future. Although the Select credit facilities and
the Concentra credit facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial.
Also, these restrictions do not prevent us or our subsidiaries from incurring obligations that do not constitute indebtedness. As of
December 31, 2018, Select had $392.5 million of availability under the Select revolving facility (as defined below) (after giving
effect to $37.5 million of outstanding letters of credit) and Concentra had $62.3 million of availability under the Concentra revolving
facility (after giving effect to $12.7 million of outstanding letters of credit). In addition, to the extent new debt is added to us and
our subsidiaries’ current debt levels, the substantial leverage risks described above would increase.
38
Concentra’s inability to meet the conditions and payments under the Concentra credit facilities, although nonrecourse to Select,
could jeopardize Select’s equity contribution to Concentra Group Holdings Parent.
Select is not a party to the Concentra credit facilities and is not an obligor with respect to Concentra’s debt under such
agreements; however, if Concentra fails to meet its obligations and defaults on the Concentra credit facilities, a portion of or all
of Select’s equity investment in Concentra Group Holdings Parent, the indirect parent company of Concentra, could be at risk of
loss.
We may be unable to refinance our debt on terms favorable to us or at all, which would negatively impact our business and
financial condition.
We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to
meet required payments of principal and interest. While we intend to refinance all of our indebtedness before it matures, there can
be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing will be on terms as favorable
to us as the terms of the maturing indebtedness or, if the indebtedness cannot be refinanced, that we will be able to otherwise
obtain funds by selling assets or raising equity to make required payments on our maturing indebtedness. Furthermore, if prevailing
interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense
relating to that refinanced indebtedness would increase. If we are unable to refinance our indebtedness at or before maturity or
otherwise meet our payment obligations, our business and financial condition will be negatively impacted, and we may be in
default under our indebtedness. Any default under the Select credit facilities would permit lenders to foreclose on our assets and
would also be deemed a default under the indenture governing Select’s 6.375% senior notes, which may also result in the acceleration
of that indebtedness, and, although Select is not a party to the Concentra credit facilities and is not an obligor with respect to
Concentra’s debt under such agreements, if Concentra fails to meet its obligations and defaults on the Concentra credit facilities,
a portion of or all of Select’s equity investment in Concentra Group Holdings Parent, the indirect parent company of Concentra,
could be at risk of loss.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.”
Item 1B. Unresolved Staff Comments.
None.
39
Item 2. Properties.
We currently lease most of our consolidated facilities, including critical illness recovery hospitals, rehabilitation hospitals,
outpatient rehabilitation clinics, occupational health centers, CBOCs, and our corporate headquarters. We own 19 of our critical
illness recovery hospitals, seven of our rehabilitation hospitals, one of our outpatient rehabilitation clinics, and eight of our
Concentra occupational health centers throughout the United States. As of December 31, 2018, we leased 77 of our critical illness
recovery hospitals, 10 of our rehabilitation hospitals, 1,422 of our outpatient rehabilitation clinics, 516 of our Concentra
occupational health centers, and 31 CBOCs throughout the United States.
We lease our corporate headquarters from companies owned by a related party affiliated with us through common ownership
or management. Our corporate headquarters is approximately 221,453 square feet and is located in Mechanicsburg, Pennsylvania.
The following is a list by state of the number of facilities we operated as of December 31, 2018.
Critical Illness
Recovery
Hospitals(1)
Rehabilitation
Hospitals(1)
Outpatient
Rehabilitation
Clinics(1)
Concentra
Occupational
Health Centers(2)
Total
Facilities
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
1
2
2
1
9
5
3
2
2
2
11
1
4
4
2
1
2
16
2
9
1
1
1
1
1
3
4
5
2
40
24
7
40
1
69
40
56
12
4
120
68
63
29
19
14
58
3
16
64
12
37
27
1
92
2
11
162
2
37
86
23
227
5
18
2
97
23
10
1
33
17
1
16
14
3
4
9
3
7
12
2
18
6
17
3
7
3
21
4
8
17
7
4
17
2
25
12
61
5
167
63
66
14
4
163
91
1
79
46
24
20
69
7
23
76
14
66
34
5
116
7
18
3
188
6
47
124
32
4
255
2
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Total Company
2
1
5
2
1
1
3
6
1
26
21
126
45
5
13
96
26
1,662
3
10
56
6
2
6
18
12
524
31
1
36
190
6
2
53
23
1
28
2,308
_______________________________________________________________________________
(1)
Includes managed critical illness recovery hospitals, rehabilitation hospitals, and outpatient rehabilitation clinics,
respectively.
(2)
Our Concentra segment also had operations in New York, West Virginia, and Wyoming.
Item 3. Legal Proceedings.
We are a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other
governmental audits and investigations in the ordinary course of its business. We cannot predict the ultimate outcome of pending
litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject
us to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state
enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future that may, either
individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations, and
liquidity.
To address claims arising out of the our operations, we maintain professional malpractice liability insurance and general
liability insurance coverages through a number of different programs that are dependent upon such factors as the state where we
are operating and whether the operations are wholly owned or are operated through a joint venture. For our wholly owned
operations, we currently maintain insurance coverages under a combination of policies with a total annual aggregate limit of up
to $40.0 million. Our insurance for the professional liability coverage is written on a “claims-made” basis, and our commercial
general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is
exceeded. For our joint venture operations, we have numerous programs that are designed to respond to the risks of the specific
joint venture. The annual aggregate limit under these programs ranges from $5.0 million to $20.0 million. The policies are
generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. We
review our insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions
in future years. We also maintain umbrella liability insurance covering claims which, due to their nature or amount, are not covered
by or not fully covered by our other insurance policies. These insurance policies also do not generally cover punitive damages
and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available
insurance, could subject us to substantial uninsured liabilities. In our opinion, the outcome of these actions, individually or in the
aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits
typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or
not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can
involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. We
are and have been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in
the future.
41
Evansville Litigation
On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint in United States of America, ex rel. Tracy
Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital—Evansville, LLC (“SSH-
Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District
Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States under the federal False Claims
Act. The plaintiff-relators are the former CEO and two former case managers at SSH-Evansville, and the defendants currently
include us, SSH-Evansville, one of our subsidiaries serving as common paymaster for its employees, and a physician who practices
at SSH-Evansville. The plaintiff-relators allege that SSH-Evansville discharged patients too early or held patients too long,
improperly discharged patients to and readmitted them from short stay hospitals, up-coded diagnoses at admission, and admitted
patients for whom long term acute care was not medically necessary. They also allege that the defendants engaged in retaliation
in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on
September 28, 2012 and served on us on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All
deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation
and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court
of its decision not to intervene in the case.
In December 2015, the defendants filed a motion to dismiss the second amended complaint on multiple grounds, including
that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on
fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff-relators
did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims
arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar
language included in the ACA. On September 30, 2016, the District Court partially granted and partially denied the defendants’
motion to dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly disclosed and that
the plaintiff-relators are not original sources, so that the public disclosure bar requires dismissal of all non-retaliation claims arising
from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the
United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did
not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff-relators did not
plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite
particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff-relators’ claims arising from conduct
from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff-relators’ retaliation
claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s
LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical
sampling to prove liability, which the Select defendants opposed. In April 2018, a U.S. magistrate judge ruled that the
plaintiff relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30,
2016, and that the plaintiff relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using
statistical sampling. The plaintiff-relators have appealed this decision to the District Judge.
We intend to vigorously defend this action, but at this time we are unable to predict the timing and outcome of this matter.
42
Wilmington Litigation
On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United
States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital—Wilmington, Inc. (“SSH-Wilmington”),
Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16-347-
LPS. The complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH-Wilmington and was
unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were
served in March 2017. In the complaint, the plaintiff-relator alleges that the Select defendants and an individual defendant, who
is a former health information manager at SSH-Wilmington, violated the False Claims Act and the Delaware False Claims and
Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine
the credentials of medical practitioners at SSH-Wilmington. In response to the Select defendants’ motion to dismiss the complaint,
in May 2017, the plaintiff-relator filed an amended complaint asserting the same causes of action. The Select defendants filed a
motion to dismiss the amended complaint based on numerous grounds, including that the amended complaint did not plead any
alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision,
failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to
allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff relator’s claims related to the alleged
failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that the Select
defendants violated the Delaware False Claims and Reporting Act. It denied the Select defendants’ motion to dismiss claims that
the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the
individual defendant due to the plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a complaint in the Superior Court of the State of
Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc. and SSH-Wilmington, C.A. No.
N17C-03-293 CLS. The Delaware complaint alleges that the defendants retaliated against her in violation of the Delaware
Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal amended complaint.
The defendants filed a motion to dismiss, or alternatively to stay, the Delaware complaint based on the pending federal amended
complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018,
the Court stayed the Delaware complaint pending the outcome of the federal case.
We intend to vigorously defend these actions, but at this time we are unable to predict the timing and outcome of this matter.
Contract Therapy Subpoena
On May 18, 2017, we received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various
documents principally relating to our contract therapy division, which contracted to furnish rehabilitation therapy services to
residents of skilled nursing facilities (“SNFs”) and other providers. We operated our contract therapy division through a subsidiary
until March 31, 2016, when we sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing
whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether
therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding
at higher paying levels. We do not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection
with possible civil, criminal, or administrative proceedings by the government. We are producing documents in response to the
subpoena and intends to fully cooperate with this investigation. At this time, we are unable to predict the timing and outcome of
this matter.
Item 4. Mine Safety Disclosures.
None.
43
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Select Medical Holdings Corporation common stock is quoted on the New York Stock Exchange under the symbol “SEM.”
Holders
At the close of business on February 1, 2019, Holdings had 135,262,167 shares of common stock issued and outstanding.
As of that date, there were 123 registered holders of record. This does not reflect beneficial stockholders who hold their stock in
nominee or “street” name through brokerage firms.
Dividend Policy
Holdings has not paid or declared any dividends on its common stock at any point during the last three fiscal years. We do
not anticipate paying any further dividends on Holdings’ common stock in the foreseeable future. We intend to retain future earnings
to finance the ongoing operations and growth of our business. Any future determination relating to our dividend policy will be
made at the discretion of Holdings’ board of directors and will depend on conditions at that time, including our financial condition,
results of operations, contractual restrictions, capital requirements, business prospects, and other factors the board of directors
may deem relevant. Additionally, certain contractual agreements we are party to, including the Select credit facilities and the
Indenture governing Select’s 6.375% senior notes, restrict our capacity to pay dividends.
Securities Authorized For Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under equity compensation plans, see Part III “Item 12—
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
44
Stock Performance Graph
The graph below compares the cumulative total stockholder return on $100 invested at the close of the market on
December 31, 2013, with dividends being reinvested on the date paid through and including the market close on December 31,
2018 with the cumulative total return of the same time period on the same amount invested in the Standard & Poor’s 500 Index
(S&P 500) and the S&P Health Care Services Select Industry Index (SPSIHP). The chart below the graph sets forth the actual
numbers depicted on the graph.
Select Medical Holdings Corporation (SEM)
$ 100.00
$ 127.71
$ 106.43
$ 118.40
$ 157.72
$ 137.17
S&P Health Care Services Select Industry Index (SPSIHP)
$ 100.00
$ 125.01
$ 128.86
$ 117.98
$ 137.90
$ 141.15
S&P 500
$ 100.00
$ 111.36
$ 110.53
$ 121.09
$ 144.61
$ 135.59
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
45
Purchases of Equity Securities by the Issuer
Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth
of shares of its common stock. The program has been extended until December 31, 2019 and will remain in effect until then, unless
further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open
market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings
did not repurchase shares during the three months ended December 31, 2018 under the authorized common stock repurchase
program.
The following table provides information regarding repurchases of our common stock during the three months ended
December 31, 2018. As set forth below, the shares repurchased during the three months ended December 31, 2018 relate entirely
to shares of common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares
issued to employees, pursuant to the provisions of our equity incentive plans.
October 1 - October 31, 2018
November 1 - November 30, 2018
December 1 - December 31, 2018
Total
Total Number of
Shares Purchased
Average Price
Paid Per Share
72,206
$
—
—
72,206
$
16.58
—
—
16.58
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under Plans or
Programs
— $
—
—
— $
185,249,048
185,249,048
185,249,048
185,249,048
46
Item 6. Selected Financial Data.
You should read the following selected historical consolidated financial data in conjunction with our consolidated financial
statements and the accompanying notes. Upon the consummation of the Concentra, Physiotherapy, and U.S. HealthWorks
acquisitions, their financial results are consolidated with Select’s effective June 1, 2015, March 4, 2016, and February 1, 2018,
respectively.
You should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which is
contained elsewhere herein. The selected historical financial data has been derived from consolidated financial statements audited
by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The selected historical consolidated financial
data as of December 31, 2017 and 2018, and for the years ended December 31, 2016, 2017, and 2018, have been derived from
our consolidated financial information included elsewhere herein. The selected historical consolidated financial data as of
December 31, 2014, 2015, and 2016, and for the years ended December 31, 2014 and 2015, have been derived from our audited
consolidated financial information not included elsewhere herein.
Statement of Operations Data:
Net operating revenues(1)
Operating expenses(2)
Depreciation and amortization
Income from operations
Loss on early retirement of debt(3)
Equity in earnings of unconsolidated subsidiaries
Non-operating gain (loss)
Interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to non-controlling
interests(4)
Net income attributable to Select Medical Holdings
Corporation
Earnings per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Dividends per share
Balance Sheet Data (at end of period):
Cash and cash equivalents
Working capital(5)(6)
Total assets(5)(6)
Total debt(5)
Redeemable non-controlling interests
Total Select Medical Holdings Corporation stockholders’
equity
$
$
$
$
$
Select Medical Holdings Corporation
For the Year Ended December 31,
2014
2015
2016
2017
2018
(In thousands, except per share data)
$
3,065,017
$
3,742,736
$
4,217,460
$
4,365,245
$
5,081,258
2,712,187
3,362,965
3,772,302
3,849,356
4,462,324
68,354
284,476
(2,277)
7,044
—
104,981
274,790
—
16,811
29,647
145,311
299,847
(11,626)
19,943
42,651
160,011
355,878
(19,719)
21,054
(49)
201,655
417,279
(14,155)
21,905
9,016
(85,446)
(112,816)
(170,081)
(154,703)
(198,493)
203,797
75,622
128,175
208,432
72,436
135,996
180,734
55,464
125,270
202,461
(18,184)
220,645
235,552
58,610
176,942
7,548
5,260
9,859
43,461
39,102
120,627
$
130,736
$
115,411
$
177,184
$
137,840
0.91
0.91
$
$
1.00
0.99
$
$
0.88
0.87
$
$
1.33
1.33
$
$
129,026
129,465
127,478
127,752
127,813
127,968
128,955
129,126
0.40
$
0.10
$
— $
— $
3,354
$
14,435
$
99,029
$
122,549
$
133,220
2,924,809
1,552,976
10,985
19,869
4,388,678
2,385,896
238,221
191,268
4,920,626
2,698,989
422,159
315,423
5,127,166
2,699,902
640,818
1.02
1.02
130,172
130,256
—
175,178
287,338
5,964,265
3,293,381
780,488
739,515
859,253
815,725
823,368
803,042
47
Statement of Operations Data:
Net operating revenues(1)
Operating expenses(2)
Depreciation and amortization
Income from operations
Loss on early retirement of debt(3)
Equity in earnings of unconsolidated subsidiaries
Non-operating gain (loss)
Interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to non-controlling
interests(4)
Net income attributable to Select Medical Corporation
Balance Sheet Data (at end of period):
Cash and cash equivalents
Working capital(5)(6)
Total assets(5)(6)
Total debt(5)
Redeemable non-controlling interests
Total Select Medical Corporation stockholders’ equity
Select Medical Corporation
For the Year Ended December 31,
2014
2015
2016
2017
2018
(In thousands)
$
3,065,017
$
3,742,736
$
4,217,460
$
4,365,245
$
5,081,258
2,712,187
3,362,965
3,772,302
3,849,356
4,462,324
68,354
284,476
(2,277)
7,044
—
104,981
274,790
—
16,811
29,647
145,311
299,847
(11,626)
19,943
42,651
160,011
355,878
(19,719)
21,054
(49)
201,655
417,279
(14,155)
21,905
9,016
(85,446)
(112,816)
(170,081)
(154,703)
(198,493)
$
$
203,797
75,622
128,175
208,432
72,436
135,996
180,734
55,464
125,270
202,461
(18,184)
220,645
7,548
5,260
9,859
43,461
120,627
$
130,736
$
115,411
$
177,184
$
3,354
$
14,435
$
99,029
$
122,549
$
133,220
2,924,809
1,552,976
10,985
739,515
19,869
4,388,678
2,385,896
238,221
859,253
191,268
4,920,626
2,698,989
422,159
815,725
315,423
5,127,166
2,699,902
640,818
823,368
235,552
58,610
176,942
39,102
137,840
175,178
287,338
5,964,265
3,293,381
780,488
803,042
_______________________________________________________________________________
(1)
For the years ended December 31, 2016, 2017, and 2018, net operating revenues reflect the adoption of Topic 606, Revenue
from Contracts with Customers. Net operating revenues were not retrospectively conformed for the years ended December
31, 2014 and 2015.
(2)
(3)
Operating expenses include cost of services, general and administrative expenses, bad debt expenses, and stock
compensation expense.
During the year ended December 31, 2014, the Company refinanced the term loans under Select’s 2011 senior secured
credit facility. A loss on early retirement of debt of $2.3 million was recognized for unamortized debt issuance costs,
unamortized original issue discount, and certain fees incurred in connection with the term loan modifications.
During the year ended December 31, 2016, the Company recognized a loss on early retirement debt of $0.8 million
relating to the repayment of series D tranche B term loans under Select’s 2011 senior secured credit facility. Additionally,
on September 26, 2016, Concentra prepaid the second lien term loan under its credit facilities. The premium plus the
expensing of unamortized deferred financing costs and original issuance discount resulted in a loss on early retirement
of debt of $10.9 million.
During the year ended December 31, 2017, the Company refinanced Select’s 2011 senior secured credit facility. A loss
on early retirement of debt of $19.7 million was recognized for unamortized debt issuance costs, unamortized original
issue discount, and certain fees incurred in connection with the refinancing.
During the year ended December 31, 2018, the Company refinanced the Select and Concentra credit facilities. A loss on
early retirement of debt of $14.2 million was recognized for unamortized debt issuance costs, unamortized original issue
discount, and certain fees incurred in connection with the refinancing.
(4)
Reflects interests held by other parties in subsidiaries, limited liability companies and limited partnerships owned and
controlled by us.
48
(5)
(6)
As of December 31, 2015, 2016, 2017, and 2018, the balance sheet data reflects the adoption of ASU 2015-03 and ASU
2015-15, Interest—Imputation of Interest, which requires unamortized debt issuance costs to be reflected as a direct
reduction of debt, rather than as a component of other assets. The balance sheet data was not retrospectively conformed
as of December 31, 2014.
As of December 31, 2016, 2017, and 2018, the balance sheet data reflects the adoption of ASU 2015-17, Balance Sheet
Classification of Deferred Taxes, which requires all deferred tax liabilities and assets be classified as non-current. The
balance sheet data was not retrospectively conformed as of December 31, 2014 and 2015.
Non-GAAP Measure Reconciliation
The following table reconciles Holdings’ net income and income from operations to Adjusted EBITDA and should be
referenced when we discuss Adjusted EBITDA. Refer to “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for further information on Adjusted EBITDA as a non-GAAP measure.
Net income
Income tax expense (benefit)
Interest expense
Non-operating loss (gain)
Equity in earnings of unconsolidated subsidiaries
Loss on early retirement of debt
Income from operations
Stock compensation expense:
Included in general and administrative
Included in cost of services
Depreciation and amortization
Concentra acquisition costs
Physiotherapy acquisition costs
U.S. HealthWorks acquisition costs
Select Medical Holdings Corporation
For the Year Ended December 31,
2014
2015
2016
2017
2018
(In thousands)
$
128,175
$
135,996
$
125,270
$
220,645
$
176,942
75,622
85,446
—
(7,044)
2,277
72,436
112,816
(29,647)
(16,811)
—
284,476
274,790
9,027
2,015
68,354
—
—
—
11,633
3,046
104,981
4,715
—
—
55,464
170,081
(42,651)
(19,943)
11,626
299,847
14,607
2,806
145,311
—
3,236
—
(18,184)
154,703
49
(21,054)
19,719
355,878
15,706
3,578
160,011
—
—
2,819
58,610
198,493
(9,016)
(21,905)
14,155
417,279
17,604
5,722
201,655
—
—
2,895
Adjusted EBITDA
$
363,872
$
399,165
$
465,807
$
537,992
$
645,155
49
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read this discussion together with the “Selected Financial Data” and consolidated financial statements and
accompanying notes included elsewhere herein.
Overview
We began operations in 1997 and, based on the number of facilities, are one of the largest operators of critical illness recovery
hospitals (previously referred to as long term acute care hospitals), rehabilitation hospitals (previously referred to as inpatient
rehabilitation facilities), outpatient rehabilitation clinics, and occupational health centers in the United States. As of December 31,
2018, we had operations in 47 states and the District of Columbia. As of December 31, 2018, we operated 96 critical illness
recovery hospitals in 27 states, 26 rehabilitation hospitals in 11 states, and 1,662 outpatient rehabilitation clinics in 37 states and
the District of Columbia. As of December 31, 2018, Concentra, a joint venture subsidiary, operated 524 occupational health centers
in 41 states. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-
based outpatient clinics (“CBOCs”).
Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the
outpatient rehabilitation segment, and the Concentra segment. Financial information for each of our segments reflects the current
reportable segment structure. We had net operating revenues of $5,081.3 million for the year ended December 31, 2018. Of this
total, we earned approximately 34% of our net operating revenues from our critical illness recovery hospital segment, approximately
14% from our rehabilitation hospital segment, approximately 21% from our outpatient rehabilitation segment, and approximately
31% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs
of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists
of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our
critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. Our outpatient rehabilitation
segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists
of occupational health centers that provide workers’ compensation injury care, physical therapy, and consumer health services as
well as onsite clinics located at employer worksites that deliver occupational medicine services. Additionally, our Concentra
segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs.
Non-GAAP Measure
We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA
is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used
by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted
EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America
(“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial
performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income
from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented
in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a
measurement determined in accordance with GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented
may not be comparable to other similarly titled measures of other companies.
We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on
early retirement of debt, stock compensation expense, acquisition costs associated with Concentra, Physiotherapy, and U.S.
HealthWorks, non-operating gain (loss), and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted
EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The table contained within “Selected Financial Data” reconciles net income and income from operations to Adjusted EBITDA
and should be referenced when we discuss Adjusted EBITDA.
50
Summary Financial Results
Year Ended December 31, 2018
For the year ended December 31, 2018, our net operating revenues increased 16.4% to $5,081.3 million, compared to $4,365.2
million for the year ended December 31, 2017. Income from operations increased 17.3% to $417.3 million for the year ended
December 31, 2018, compared to $355.9 million for the year ended December 31, 2017.
Net income was $176.9 million for the year ended December 31, 2018, compared to $220.6 million for the year ended
December 31, 2017. For the year ended December 31, 2018, net income included a pre-tax loss on early retirement of debt of
$14.2 million, pre-tax non-operating gains of $9.0 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million. For
the year ended December 31, 2017, net income included a pre-tax loss on early retirement of debt of $19.7 million, pre-tax U.S.
HealthWorks acquisition costs of $2.8 million, and an income tax benefit of $71.5 million resulting primarily from the effects of
the federal tax reform legislation enacted on December 22, 2017. The decrease in net income was principally due to the income
tax benefit recognized during the year ended December 31, 2017, as discussed above.
Our Adjusted EBITDA increased 19.9% to $645.2 million for the year ended December 31, 2018, compared to $538.0
million for the year ended December 31, 2017. Our Adjusted EBITDA margin increased to 12.7% for the year ended December 31,
2018, compared to 12.3% for the year ended December 31, 2017.
The following tables reconcile our segment performance measures to our consolidated operating results:
For the Year Ended December 31, 2018
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
(in thousands)
Net operating revenues
$
1,753,584
$
707,514
$
1,062,487
$
1,557,673
$
— $
5,081,258
Operating expenses
1,510,569
598,587
Depreciation and amortization
Income from operations
Depreciation and amortization
Stock compensation expense
U.S. HealthWorks acquisition costs
45,797
197,218
45,797
—
—
24,101
84,826
24,101
—
—
920,482
27,195
114,810
27,195
—
—
1,311,474
121,212
4,462,324
95,521
150,678
95,521
2,883
2,895
9,041
(130,253)
9,041
20,443
—
201,655
417,279
201,655
23,326
2,895
Adjusted EBITDA
$
243,015
$
108,927
$
142,005
$
251,977
$
(100,769) $
645,155
Adjusted EBITDA margin
13.9%
15.4%
13.4%
16.2%
N/M
12.7%
For the Year Ended December 31, 2017
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
(in thousands)
Net operating revenues
$
1,725,022
$
622,469
$
1,003,830
$
1,013,224
$
700
$
4,365,245
Operating expenses
1,472,343
532,428
Depreciation and amortization
Income from operations
Depreciation and amortization
Stock compensation expense
U.S. HealthWorks acquisition costs
45,743
206,936
45,743
—
—
20,176
69,865
20,176
—
—
871,297
24,607
107,926
24,607
—
—
859,475
113,813
3,849,356
61,945
91,804
61,945
993
2,819
7,540
(120,653)
7,540
18,291
—
160,011
355,878
160,011
19,284
2,819
Adjusted EBITDA
$
252,679
$
90,041
$
132,533
$
157,561
$
(94,822) $
537,992
Adjusted EBITDA margin
14.6%
14.5%
13.2%
15.6%
N/M
12.3%
51
The following table provides the change in segment performance measures for the year ended December 31, 2018, compared
to the year ended December 31, 2017:
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
Change in net operating revenues
Change in income from operations
Change in Adjusted EBITDA
1.7 %
(4.7)%
(3.8)%
13.7%
21.4%
21.0%
5.8%
6.4%
7.1%
53.7%
64.1%
59.9%
N/M
(8.0)%
(6.3)%
16.4%
17.3%
19.9%
_______________________________________________________________________________
N/M—Not Meaningful.
Year Ended December 31, 2017
For the year ended December 31, 2017, our net operating revenues increased 3.5% to $4,365.2 million, compared to $4,217.5
million for the year ended December 31, 2016. Income from operations increased 18.7% to $355.9 million for the year ended
December 31, 2017, compared to $299.8 million for the year ended December 31, 2016.
Net income increased 76.1% to $220.6 million for the year ended December 31, 2017, compared to $125.3 million for the
year ended December 31, 2016. For the year ended December 31, 2017, net income included a pre-tax loss on early retirement of
debt of $19.7 million, pre-tax U.S. HealthWorks acquisition costs of $2.8 million, and an income tax benefit of $71.5 million
resulting primarily from the effects of the federal tax reform legislation enacted on December 22, 2017. For the year ended
December 31, 2016, net income included a pre-tax loss on early retirement of debt of $11.6 million, pre-tax non-operating gains
of $42.7 million, and pre-tax Physiotherapy acquisition costs of $3.2 million. The increase in our net income was principally due
to an increase in income from operations and the income tax benefit recognized during the year ended December 31, 2017, as
discussed above.
Our Adjusted EBITDA increased 15.5% to $538.0 million for the year ended December 31, 2017, compared to $465.8
million for the year ended December 31, 2016. Our Adjusted EBITDA margin improved to 12.3% for the year ended December 31,
2017, compared to 11.0% for the year ended December 31, 2016.
The following tables reconcile our segment performance measures to our consolidated operating results:
For the Year Ended December 31, 2017
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
(in thousands)
Net operating revenues
$
1,725,022
$
622,469
$
1,003,830
$
1,013,224
$
700
$
4,365,245
Operating expenses
1,472,343
532,428
Depreciation and amortization
Income from operations
Depreciation and amortization
Stock compensation expense
U.S. HealthWorks acquisition costs
45,743
206,936
45,743
—
—
20,176
69,865
20,176
—
—
871,297
24,607
107,926
24,607
—
—
859,475
113,813
3,849,356
61,945
91,804
61,945
993
2,819
7,540
(120,653)
7,540
18,291
—
160,011
355,878
160,011
19,284
2,819
Adjusted EBITDA
$
252,679
$
90,041
$
132,533
$
157,561
$
(94,822) $
537,992
Adjusted EBITDA margin
14.6%
14.5%
13.2%
15.6%
N/M
12.3%
52
For the Year Ended December 31, 2016
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
(in thousands)
Net operating revenues
$
1,756,961
$
498,100
$
979,363
$
982,495
$
541
$
4,217,460
Operating expenses
1,532,352
441,198
Depreciation and amortization
Income from operations
Depreciation and amortization
Stock compensation expense
Physiotherapy acquisition costs
43,862
180,747
43,862
—
—
12,723
44,179
12,723
—
—
849,533
22,661
107,169
22,661
—
—
840,256
108,963
3,772,302
60,717
81,522
60,717
770
—
5,348
(113,770)
5,348
16,643
3,236
145,311
299,847
145,311
17,413
3,236
Adjusted EBITDA
$
224,609
$
56,902
$
129,830
$
143,009
$
(88,543) $
465,807
Adjusted EBITDA margin
12.8%
11.4%
13.3%
14.6%
N/M
11.0%
The following table provides the change in segment performance measures for the year ended December 31, 2017, compared
to the year ended December 31, 2016:
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
Change in net operating revenues
Change in income from operations
Change in Adjusted EBITDA
(1.8)%
14.5 %
12.5 %
25.0%
58.1%
58.2%
2.5%
0.7%
2.1%
3.1%
12.6%
10.2%
N/M
(6.0)%
(7.1)%
3.5%
18.7%
15.5%
_______________________________________________________________________________
N/M—Not Meaningful.
53
Significant Events
Acquisition of U.S. HealthWorks
On February 1, 2018, Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, an
occupational medicine and urgent care provider, pursuant to the terms of an Equity Purchase and Contribution Agreement (the
“Purchase Agreement”). Concentra acquired U.S. HealthWorks for $753.6 million. DHHC, a subsidiary of Dignity Health, was
issued a 20% equity interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The remainder of the
purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the
closing of the transaction.
Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement,
as described below, together with cash on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S.
HealthWorks to DHHC, to finance the redemption and reorganization transactions executed under the Purchase Agreement, and
to pay fees and expenses associated with the financing.
Amendments to the Concentra Credit Facilities
On February 1, 2018, in connection with the acquisition of U.S. HealthWorks, Concentra entered into Amendment No. 3 to
the Concentra first lien credit agreement. Among other things, Amendment No. 3 (i) provided for an additional $555.0 million in
first lien term loans that, along with the existing first lien term loan under the Concentra first lien credit agreement, have a maturity
date of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) added an additional $25.0 million of revolving
loans, that along with the existing $50.0 million revolving loans, comprise the five-year Concentra revolving facility under the
terms of the existing Concentra first lien credit agreement. Prior to subsequent amendments, the Concentra first lien term loan’s
interest rate was equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to
an Adjusted LIBO Rate floor of 1.00%), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus
1.75% (subject to an Alternate Base Rate floor of 2.00%). All other material terms and conditions applicable to the original first
lien term loan commitments were applicable to the additional first lien term loans created under the Concentra first lien credit
agreement.
In addition, Concentra entered into the Concentra second lien credit agreement that provided for $240.0 million in term loans
(the “Concentra second lien term loan”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit
agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus
6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or the Alternate Base Rate (as defined in the Concentra second lien
credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement. Among other
things, Amendment No. 4 (i) provides for an applicable interest rate on the Concentra first lien term loan of the Adjusted LIBO
Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being
the initial rate), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from
1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreases the applicable
interest rate on the loans outstanding under the Concentra revolving facility from the Adjusted LIBO Rate plus a percentage ranging
from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate
plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in
each case subject to Concentra’s leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted
LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to a floor.
Amendments to the Select Credit Facilities
On March 22, 2018, Select entered into Amendment No. 1 to the Select credit agreement dated March 6, 2017. Amendment
No. 1 (i) decreased the applicable interest rate on the Select term loan from the Adjusted LIBO Rate (as defined in the Select credit
agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate plus a percentage ranging
from 2.50% to 2.75%, or from the Alternate Base Rate (as defined in the Select credit agreement and subject to an Alternate Base
Rate floor of 2.00%) plus 2.50% to the Alternate Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case subject
to a specified leverage ratio; (ii) decreased the applicable interest rate on the loans outstanding under the Select revolving facility
from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO Rate plus a percentage ranging
from 2.50% to 2.75%, or from the Alternate Base Rate plus a percentage ranging from 2.00% to 2.25% to the Alternate Base Rate
plus a percentage ranging from 1.50% to 1.75%, in each case subject to a specified leverage ratio; (iii) extended the maturity date
for the Select term loan from March 6, 2024, to March 6, 2025; and (iv) made certain other technical amendments to the Select
credit agreement as set forth therein.
54
On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement. Among other things, Amendment
No. 2 (i) decreased the applicable interest rate on the Select term loan from the Adjusted LIBO Rate (as defined in the Select credit
agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to
2.50%, or from the Alternate Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75%
to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified leverage ratio (as
defined in the Select credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the Select
revolving facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus
a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate (as defined in the Select credit agreement) plus a
percentage ranging from 1.50% to 1.75% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case
subject to a specified leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement
are no longer subject to the floor.
55
Regulatory Changes
The Medicare program reimburses us for services furnished to Medicare beneficiaries, which are generally persons age 65
and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the
Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net
operating revenues generated directly from the Medicare program represented approximately 30%, 30%, and 27% of the Company’s
net operating revenues for the years ended December 31, 2016, 2017, and 2018, respectively.
The Medicare program reimburses various types of providers using different payment methodologies. Those payment
methodologies are complex and are described elsewhere in this report under “Business—Government Regulations.” The following
is a summary of some of the more significant healthcare regulatory changes that have affected our financial performance in the
periods covered by this report or are likely to affect our financial performance and financial condition in the future.
Medicare Reimbursement of LTCH Services
There have been significant regulatory changes affecting our critical illness recovery hospitals, which are certified by
Medicare as LTCHs, that have affected our net operating revenues and, in some cases, caused us to change our operating models
and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures of CMS. All Medicare
payments to our critical illness recovery hospitals are made in accordance with LTCH-PPS. Proposed rules specifically related to
LTCH-PPS are generally published in May, finalized in August and effective on October 1 of each year.
The following is a summary of significant changes to LTCH-PPS which have affected our results of operations, as well as
the policies and payment rates that may affect our future results of operations.
Fiscal Year 2017. On August 22, 2016, CMS published the final rule updating policies and payment rates for the LTCH-
PPS for fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through
September 30, 2017). The standard federal rate was set at $42,476, an increase from the standard federal rate applicable during
fiscal year 2016 of $41,763. The update to the standard federal rate for fiscal year 2017 included a market basket increase of 2.8%,
less a productivity adjustment of 0.3%, and less a reduction of 0.75% mandated by the Affordable Care Act (“ACA”). The fixed-
loss amount for high cost outlier cases paid under LTCH-PPS was set at $21,943, an increase from the fixed-loss amount in the
2016 fiscal year of $16,423. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at
$23,573, an increase from the fixed-loss amount in the 2016 fiscal year of $22,538.
Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS
for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30,
2018). Certain errors in the final rule published on August 14, 2017 were corrected in a final rule published October 4, 2017. The
standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476.
The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment
of 0.6%, and less a reduction of 0.75% mandated by the ACA. The update to the standard federal rate for fiscal year 2018 was
further impacted by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to
1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss
amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment
rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.
Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-
PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September
30, 2019). Certain errors in the final rule were corrected in a final rule published October 3, 2018. The standard federal rate was
set at $41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard
federal rate for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a
reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget-neutrality factor of 0.999215
and a temporary, one-time budget-neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule
(discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, a decrease from
the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-
neutral payment rate was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.
56
25 Percent Rule
The “25 Percent Rule” was a downward payment adjustment that applied if the percentage of Medicare patients discharged
from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with
the referring hospital) exceeded the applicable percentage admissions threshold during a particular cost reporting period.
CMS was precluded from applying the 25 Percent Rule for freestanding LTCHs to cost reporting years beginning before
July 1, 2016 and for discharges occurring on or after October 1, 2016 and before October 1, 2017. In addition, the law applied
higher percentage admissions thresholds for most LTCHs operating as HIHs and satellites for cost reporting years beginning before
July 1, 2016 and effective for discharges occurring on or after October 1, 2016 and before October 1, 2017.
For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule.
For fiscal year 2019 and thereafter, CMS eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is
being implemented in a budget-neutral manner by adjusting the standard federal payment rates down such that the projection of
aggregate LTCH payments would equal the projection of aggregate LTCH payments that would have been paid if the moratorium
ended and the 25 Percent Rule went into effect on October 1, 2018. As a result, the elimination of the 25 Percent Rule includes a
temporary, one-time adjustment of 0.990878 to the fiscal year 2019 LTCH-PPS standard federal payment rate, a temporary, one-
time adjustment of 0.990737 to the fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment
of 0.991249 to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.
Short Stay Outlier Policy
CMS established a different payment methodology for Medicare patients with a length of stay less than or equal to five-
sixths of the geometric average length of stay for that particular MS-LTC-DRG, referred to as a short stay outlier (“SSO”). SSO
cases are paid based on a per diem rate derived from blending 120% of the MS-LTC-DRG specific per diem amount with a per
diem rate based on the general acute care hospital IPPS. Under this policy, as the length of stay of a SSO case increases, the
percentage of the per diem payment amounts based on the full MS-LTCH-DRG standard federal payment rate increases and the
percentage of the payment based on the IPPS comparable amount decreases.
Medicare Reimbursement of IRF Services
The following is a summary of significant changes to the Medicare prospective payment system for our rehabilitation hospitals,
which are certified by Medicare as IRFs, which have affected our results of operations, as well as the policies and payment rates
that may affect our future results of operations.
Fiscal Year 2017. On August 5, 2016, CMS published the final rule updating policies and payment rates for the IRF-PPS for
fiscal year 2017 (affecting discharges and cost reporting periods beginning on or after October 1, 2016 through September 30,
2017). The standard payment conversion factor for discharges for fiscal year 2017 was set at $15,708, an increase from the standard
payment conversion factor applicable during fiscal year 2016 of $15,478. The update to the standard payment conversion factor
for fiscal year 2017 included a market basket increase of 2.7%, less a productivity adjustment of 0.3%, and less a reduction of
0.75% mandated by the ACA. CMS decreased the outlier threshold amount for fiscal year 2017 to $7,984 from $8,658 established
in the final rule for fiscal year 2016.
Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS
for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30,
2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard
payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor
for fiscal year 2018 included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of
0.75% mandated by the ACA. The standard payment conversion factor for fiscal year 2018 was further impacted by the Medicare
Access and CHIP Reauthorization Act of 2015, which limited the update for fiscal year 2018 to 1.0%. CMS increased the outlier
threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.
Fiscal Year 2019. On August 6, 2018, CMS published the final rule updating policies and payment rates for the IRF-PPS
for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30,
2019). The standard payment conversion factor for discharges for fiscal year 2019 was set at $16,021, an increase from the standard
payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor
for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of
0.75% mandated by the ACA. CMS increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established
in the final rule for fiscal year 2018.
57
Medicare Reimbursement of Outpatient Rehabilitation Clinic Services
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For
services provided in 2017 through 2019, a 0.5% update will be applied each year to the fee schedule payment rates, subject to an
adjustment beginning in 2019 under the Merit-Based Incentive Payment System (“MIPS”). For services provided in 2020 through
2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and
the alternative payment models (“APMs”). In 2026 and subsequent years eligible professionals participating in APMs that meet
certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.
Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures
performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS
requirements a provider’s performance is assessed according to established performance standards and used to determine an
adjustment factor that is then applied to the professional’s payment for a year. Each year from 2019 through 2024 professionals
who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment
arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus
payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of
incentives across payors. MIPS and APM apply to physicians and other practitioners included within the definition of “eligible
clinicians.” Currently, physical therapists and occupational therapists may voluntarily participate in MIPS and APM. In the
Medicare Physician Fee Schedule final rule for calendar year 2019, CMS adopted a final policy to include physical therapists,
occupational therapists and qualified speech-language pathologists as “eligible clinicians” and require them to participate in these
programs beginning in the 2021 MIPS payment year. The specifics of the MIPS and APM adjustments beginning in 2019 and
2020, respectively, remain subject to future notice and comment rule-making. For the year ended December 31, 2018, we received
approximately 15% of our outpatient rehabilitation net operating revenues from Medicare.
Therapy Caps
Outpatient therapy providers reimbursed under the Medicare physician fee schedule have been subject to annual limits for
therapy expenses. For example, for the calendar year beginning January 1, 2017, the annual limit on outpatient therapy services
was $1,980 for combined physical and speech language pathology services and $1,980 for occupational therapy services. The
Bipartisan Budget Act of 2018 repealed the annual limits on outpatient therapy.
The annual limits for therapy expenses historically did not apply to services furnished and billed by outpatient hospital
departments. However, the Medicare Access and CHIP Reauthorization Act of 2015 and prior legislation extended the annual
limits on therapy expenses in hospital outpatient department settings through December 31, 2017. The application of annual limits
to hospital outpatient department settings sunset on December 31, 2017.
Prior to calendar year 2028, all therapy claims exceeding $3,000 are subject to a manual medical review process. The $3,000
threshold is applied to physical therapy and speech therapy services combined and separately applied to occupational therapy.
CMS will continue to require that an appropriate modifier be included on claims over the current exception threshold indicating
that the therapy services are medically necessary. Beginning in 2028 and in each calendar year thereafter, the threshold amount
for claims requiring manual medical review will increase by the percentage increase in the Medicare Economic Index.
Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants
In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS established two new modifiers to identify
services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These
modifiers were mandated by the Bipartisan Budget Act of 2018, which requires that claims for outpatient therapy services furnished
in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these
modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee
schedule rate beginning on January 1, 2022.
58
Critical Accounting Matters
Revenue Adjustments
Net operating revenues include amounts estimated by us to be reimbursable by Medicare under prospective payment systems
and provisions of cost-reimbursement and other payment methods. The amount reimbursed is derived based on the type of services
provided. Additionally, we are reimbursed for healthcare services provided from various other payor sources which include
insurance companies, workers’ compensation programs, health maintenance organizations, preferred provider organizations, other
managed care companies and employers, as well as patients. We are reimbursed by these payors using a variety of payment
methodologies.
On January 1, 2018, we adopted Topic 606, Revenue from Contracts with Customers. Under Topic 606, we recognize a
contractual allowance for fixed discounts based on the difference between our standard billing rates and the fees legislated,
negotiated or otherwise arranged between us and our patients. Additionally, we are subject to potential retrospective adjustments
to net operating revenues in future periods, such as for matters related to claims processing and other price concessions. These
adjustments, which are estimated based on an analysis of historical experience by payor source, are recognized as a constraint to
revenue in the period services are rendered. Under the previous standard, these adjustments were classified as a component of bad
debt expense.
In the critical illness recovery hospital and rehabilitation hospital segments, we estimate our contractual allowances based
on known contractual provisions associated with the specific payor or, where we have a relatively homogeneous patient population,
we will monitor individual payors’ historical reimbursement rates to estimate a per diem rate. The estimated per diem rate is used
to derive the contractual allowance recognized in the period services are rendered. In the outpatient rehabilitation and Concentra
segments, we estimate our contractual allowances based on known contractual provisions, negotiated amounts, or usual and
customary amounts associated with the specific payor. We estimate our contractual allowances using internally developed systems
in which we monitor a payors’ historical reimbursement rates and compare them against the associated gross charges for the service
provided. The percentage of historical reimbursed claims to gross charges is used to estimate the contractual allowance recognized
in the period services are rendered. In each of our segments, estimates for potential retrospective adjustments are recognized as
an additional contractual allowance during the period services are rendered.
Accounts Receivable
Substantially all of our accounts receivable are related to providing healthcare services to patients whose costs are primarily
paid by federal and state governmental authorities, managed care health plans, commercial insurance companies, and workers’
compensation and employer programs. We report accounts receivable at an amount equal to the consideration we expect to receive
in exchange for providing healthcare services to our patients, which is estimated using contractual provisions associated with
specific payors, historical reimbursement rates, and an analysis of past experience to estimate potential retrospective adjustments.
Amounts that have been deemed to be uncollectible because of circumstances that affect the ability of payors to make payments
are written-off as bad debt expense as they occur.
Collection of these accounts receivable is our primary source of cash and is critical to our liquidity and capital resources.
Our primary collection risks relate to non-governmental payors who insure these patients and deductibles, co-payments, and
amounts owed by the patient. Deductibles, co-payments, and self-insured amounts owed by the patient are an immaterial portion
of our accounts receivable balance and accounted for approximately 0.3% of our net accounts receivable balance at December 31,
2018. Our general policy is to verify insurance coverage prior to the date of admission for patients admitted to our critical illness
recovery hospitals and rehabilitation hospitals. Within our outpatient rehabilitation clinics, we verify insurance coverage prior to
the patient’s visit. Within our Concentra centers, we verify insurance coverage or receive authorization from the patient’s employer
prior to the patient’s visit.
The following table is an aging of our accounts receivable (in thousands):
December 31, 2017
December 31, 2018
0 - 90
Days
91 - 180
Days
181 - 365
Days
Over 365
Days
0 - 90
Days
91 - 180
Days
181 - 365
Days
Over 365
Days
Commercial insurance and other
$ 350,563
$
47,395
$
38,601
$
28,079
$ 409,521
$
62,956
$
45,811
$
33,662
Medicare and Medicaid
208,234
7,985
5,225
5,650
137,771
7,217
4,885
4,853
Total accounts receivable
$ 558,797
$
55,380
$
43,826
$
33,729
$ 547,292
$
70,173
$
50,696
$
38,515
59
The approximate percentage of accounts receivable summarized by aging categories is as follows:
0 to 90 days
91 to 180 days
181 to 365 days
Over 365 days
Total
The approximate percentage of accounts receivable summarized by insured status is as follows:
Commercial insurance and other
Medicare and Medicaid
Self-pay receivables (including deductibles and co-payments)
Total
Insurance
December 31,
2017
2018
80.8%
8.0%
6.3%
4.9%
77.4%
9.9%
7.2%
5.5%
100.0%
100.0%
December 31,
2017
2018
66.9%
32.8%
0.3%
77.8%
21.9%
0.3%
100.0%
100.0%
Under a number of our insurance programs, which include our employee health insurance, workers’ compensation, and
professional malpractice liability insurance programs, we are liable for a portion of our losses before we can attempt to recover
from the applicable insurance carrier. We accrue for losses under an occurrence-based approach, whereby we estimate the losses
that will be incurred in a respective accounting period and accrue that estimated liability using actuarial methods. We monitor
these programs quarterly and revise our estimates as necessary to take into account additional information. We recorded a liability
of $157.1 million and $175.2 million for our estimated losses under these insurance programs at December 31, 2017 and 2018,
respectively. We also recorded insurance proceeds receivable of $25.8 million and $32.4 million at December 31, 2017 and 2018,
respectively, for liabilities which exceed the Company’s deductibles and self-insured retention limits and are recoverable through
insurance policies.
Intangible Assets
Goodwill and other indefinite-lived intangible assets are not amortized, but instead are subject to periodic impairment
evaluations. Impairment tests are required to be conducted at least annually or when events or conditions occur that might suggest
a possible impairment. These events or conditions include, but are not limited to: a significant adverse change in the business
environment, regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of
such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence
of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge.
We may first assess qualitatively if we can conclude whether goodwill is more likely than not impaired. If goodwill is more
likely than not impaired, we are then required to complete a quantitative analysis of whether a reporting unit’s fair value is less
than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, we consider relevant events or circumstances that affect the fair value or carrying amount of a reporting unit,
including (i) industry and market conditions, (ii) financial performance, such as negative or declining cash flows, or a decline in
net operating revenues or earnings compared with actual and forecasted results, (iii) the regulatory environment affecting each of
our reporting units, including reimbursement and compliance requirements under the Medicare program, and (iv) other factors
specific to each reporting unit, such as a change in strategy, management, or acquisitions or divestitures affecting the composition
of the reporting unit.
60
We consider both the income and market approach in determining the fair value of our reporting units when performing a
quantitative analysis. Included in the income approach, specific for each reporting unit, are assumptions regarding revenue growth
rate, future Adjusted EBITDA margin estimates, future general and administrative expense rates, and the industry’s weighted
average cost of capital and industry specific, market comparable implied Adjusted EBITDA multiples. We also include estimated
residual values at the end of the forecast period and future capital expenditure requirements. Each of these assumptions requires
us to use our knowledge of the industry, its recent transactions, and reasonable performance expectations for its operations. If any
one of the above assumptions changes or fails to materialize, the resulting decline in our estimated fair value could result in an
impairment charge to the goodwill associated with any one of the reporting units.
At December 31, 2018, our other indefinite-lived intangible assets consist of certain trademarks, certificates of need, and
accreditations. To determine the fair value of our trademarks, we use a relief from royalty income approach. For our certificates
of need and accreditations, we perform a qualitative assessment. As part of this assessment, we evaluate the current business
environment, regulatory environment, legal and other company-specific factors. If it is more likely than not that the fair value is
less than the carrying value, we perform a quantitative impairment test.
Our most recent impairment assessments were completed during the fourth quarter of 2018. We performed a qualitative
goodwill impairment assessment for each of our reporting units as of October 1, 2018. We did not identify any instances of
impairment with respect to goodwill or other indefinite-lived intangible assets as of October 1, 2018. During the fourth quarters
of 2016 and 2017, we performed quantitative impairment assessments for each of our reporting units. Our impairment assessments
completed during these periods did not identify any instances of impairment with respect to goodwill or other indefinite-lived
intangible assets.
We have recorded total goodwill and other identifiable intangible assets of $3.8 billion at December 31, 2018, of which $1.1
billion relates to our critical illness recovery hospital reporting unit, $441.1 million relates to our rehabilitation hospital reporting
unit, $701.9 million relates to our outpatient rehabilitation reporting unit, and $1.5 billion relates to the Concentra reporting unit.
Realization of Deferred Tax Assets
We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized
in our financial statements. Deferred tax assets and liabilities are determined on the basis of the differences between the book and
tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.
We also recognize the future tax benefits from net operating loss carryforwards as deferred tax assets. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We evaluate the realizability of deferred tax assets and reduce those assets using a valuation allowance if it is more likely
than not that some portion or all of the deferred tax asset will not be realized. Among the factors used to assess the likelihood of
realization are projections of future taxable income streams, the expected timing of the reversals of existing temporary differences,
and the impact of tax planning strategies that could be implemented to avoid the potential loss of future tax benefits. However,
changes in tax codes, statutory tax rates or future taxable income levels could materially impact our valuation of tax accruals and
assets and could cause our provision for income taxes to vary significantly from period to period.
At December 31, 2018, we had deferred tax liabilities in excess of deferred tax assets of approximately $135.3 million
principally due to depreciation deductions that have been accelerated for tax purposes and amortization of intangibles and goodwill.
This amount includes approximately $17.9 million of valuation reserves related primarily to state net operating losses.
61
Operating Statistics
The following table sets forth operating statistics for each of our operating segments for each of the periods presented. The
operating statistics reflect data for the period of time we managed these operations:
Critical illness recovery hospital data:(1)
Number of hospitals owned—start of period
Number of hospitals acquired
Number of hospital start-ups
Number of hospitals closed/sold
Number of hospitals owned—end of period
Number of hospitals managed—end of period
Total number of hospitals (all)—end of period
Available licensed beds(2)
Admissions(2)
Patient days(2)
Average length of stay (days)(2)
Net revenue per patient day(2)(3)(5)
Occupancy rate(2)
Percent patient days—Medicare(2)
Rehabilitation hospital data:(1)
Number of facilities owned—start of period
Number of facilities acquired
Number of facilities start-ups
Number of facilities closed/sold
Number of facilities owned—end of period
Number of facilities managed—end of period
Total number of facilities (all)—end of period
Available licensed beds(2)
Admissions(2)
Patient days(2)
Average length of stay (days)(2)
Net revenue per patient day(2)(3)(5)
Occupancy rate(2)
Percent patient days—Medicare(2)
Outpatient rehabilitation data:
Number of clinics owned—start of period
Number of clinics acquired
Number of clinic start-ups
Number of clinics closed/sold
Number of clinics owned—end of period
Number of clinics managed—end of period
Total number of clinics (all)—end of period
Number of visits(2)
Net revenue per visit(2)(4)(5)
For the Year Ended December 31,
2016
2017
2018
108
4
—
(10)
102
1
103
4,254
36,859
102
1
1
(5)
99
1
100
4,159
35,793
99
—
1
(4)
96
—
96
4,071
36,474
1,041,074
1,003,161
1,012,368
28
28
$
1,663
$
1,704
$
65%
55%
10
1
2
—
13
7
20
66%
54%
13
—
3
—
16
8
24
983
14,670
216,994
15
1,133
18,841
269,905
14
$
1,441
$
1,577
$
71%
53%
896
559
28
(38)
1,445
166
1,611
72%
54%
1,445
13
28
(39)
1,447
169
1,616
28
1,716
67%
53%
16
—
1
—
17
9
26
1,189
21,813
315,468
14
1,606
74%
54%
1,447
20
34
(78)
1,423
239
1,662
7,799,208
8,232,536
8,356,018
$
100
$
101
$
103
62
Concentra data:
Number of centers owned—start of period
Number of centers acquired
Number of center start-ups
Number of centers closed/sold
Number of centers owned—end of period
Number of visits(2)
Net revenue per visit(2)(4)(5)
For the Year Ended December 31,
2016
2017
2018
300
4
—
(4)
300
300
11
4
(3)
312
312
221
—
(9)
524
7,373,751
7,709,508
11,426,940
$
116
$
115
$
124
_______________________________________________________________________________
(1)
The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The
rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.
(2)
(3)
(4)
(5)
Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-
based outpatient clinics are excluded.
Net revenue per patient day is calculated by dividing direct patient service revenues by the total number of patient days.
Net revenue per visit is calculated by dividing direct patient service revenue by the total number of visits. For purposes
of this computation for our Concentra segment, direct patient service revenue does not include onsite clinics and
community-based outpatient clinics.
Net revenue per patient day and net revenue per visit were retrospectively conformed to reflect the impact of Topic 606,
Revenue from Contracts with Customers.
Results of Operations
The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:
Net operating revenues
Cost of services(1)
General and administrative
Depreciation and amortization
Income from operations
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating gain (loss)
Interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Net income attributable to non-controlling interests
Net income attributable to Holdings and Select
For the Year Ended December 31,
2016
2017
2018
100.0%
100.0%
100.0%
86.9
2.5
3.5
7.1
(0.3)
0.5
1.0
(4.0)
4.3
1.3
3.0
0.3
85.6
2.6
3.6
8.2
(0.5)
0.5
(0.0)
(3.6)
4.6
(0.5)
5.1
1.0
85.4
2.4
4.0
8.2
(0.3)
0.4
0.2
(3.9)
4.6
1.1
3.5
0.8
2.7%
4.1%
2.7%
_______________________________________________________________________________
(1)
Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating
costs.
63
The following table summarizes selected financial data by business segment for the periods indicated:
Net operating revenues:(1)
Critical illness recovery hospital(2)
Rehabilitation hospital(2)
Outpatient rehabilitation(3)
Concentra(4)
Other(5)
Total Company
Income (loss) from operations:
Critical illness recovery hospital(2)
Rehabilitation hospital(2)
Outpatient rehabilitation(3)
Concentra(4)
Other(5)
Total Company
Adjusted EBITDA:
Critical illness recovery hospital(2)
Rehabilitation hospital(2)
Outpatient rehabilitation(3)
Concentra(4)
Other(5)
Total Company
Adjusted EBITDA margins:
Critical illness recovery hospital(2)
Rehabilitation hospital(2)
Outpatient rehabilitation(3)
Concentra(4)
Other(5)
Total Company
Total assets:(6)
Critical illness recovery hospital(2)
Rehabilitation hospital(2)
Outpatient rehabilitation(3)
Concentra(4)
Other(5)
Total Company
Purchases of property and equipment, net:
Critical illness recovery hospital(2)
Rehabilitation hospital(2)
Outpatient rehabilitation(3)
Concentra(4)
Other(5)
Year Ended December 31,
2016
2017
2018
% Change
2016 - 2017
% Change
2017 - 2018
$
1,756,961
$
1,725,022
$
1,753,584
(1.8)%
1.7 %
25.0
2.5
3.1
N/M
3.5 %
13.7
5.8
53.7
N/M
16.4 %
14.5 %
(4.7)%
58.1
0.7
12.6
(6.0)
18.7 %
21.4
6.4
64.1
(8.0)
17.3 %
12.5 %
(3.8)%
58.2
2.1
10.2
(7.1)
15.5 %
21.0
7.1
59.9
(6.3)
19.9 %
498,100
979,363
982,495
541
4,217,460
180,747
44,179
107,169
81,522
(113,770)
299,847
224,609
56,902
129,830
143,009
$
$
$
$
622,469
1,003,830
1,013,224
700
4,365,245
206,936
69,865
107,926
91,804
(120,653)
355,878
252,679
90,041
132,533
157,561
$
$
$
$
707,514
1,062,487
1,557,673
—
5,081,258
197,218
84,826
114,810
150,678
(130,253)
417,279
243,015
108,927
142,005
251,977
$
$
$
$
(88,543)
(94,822)
(100,769)
$
465,807
$
537,992
$
645,155
12.8%
14.6%
13.9%
11.4
13.3
14.6
N/M
11.0%
14.5
13.2
15.6
N/M
12.3%
15.4
13.4
16.2
N/M
12.7%
$
1,910,013
$
1,848,783
$
1,771,605
$
$
621,105
969,014
1,313,176
107,318
4,920,626
48,626
60,513
21,286
15,946
15,262
$
$
868,517
954,661
1,340,919
114,286
5,127,166
49,720
96,477
27,721
28,912
30,413
$
$
894,192
1,002,819
2,178,868
116,781
5,964,265
40,855
42,389
30,553
42,205
11,279
Total Company
$
161,633
$
233,243
$
167,281
64
_______________________________________________________________________________
(1)
Net operating revenues were retrospectively conformed to reflect the adoption Topic 606, Revenue from Contracts with
Customers.
(2)
(3)
(4)
(5)
(6)
The critical illness recovery hospital segment was previously referred to as the long term acute care segment. The
rehabilitation hospital segment was previously referred to as the inpatient rehabilitation segment.
The outpatient rehabilitation segment includes the operating results of our contract therapy businesses through March 31,
2016 and Physiotherapy beginning March 4, 2016.
The Concentra segment includes the operating results of U.S. HealthWorks beginning February 1, 2018.
Other includes our corporate services. Total assets includes certain non-consolidating joint ventures and minority
investments in other healthcare related businesses.
As of December 31, 2016, total assets were retrospectively conformed to reflect the adoption ASU 2015-17, Balance
Sheet Classification of Deferred Taxes, which resulted in a reduction to total assets of $23.8 million.
N/M — Not meaningful.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA,
depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated
subsidiaries, non-operating gain (loss), interest expense, income taxes, and net income attributable to non-controlling interests,
which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased 16.4% to $5,081.3 million for the year ended December 31, 2018, compared to $4,365.2
million for the year ended December 31, 2017.
Critical Illness Recovery Hospital Segment. Net operating revenues increased 1.7% to $1,753.6 million for the year ended
December 31, 2018, compared to $1,725.0 million for the year ended December 31, 2017. As of December 31, 2018, we operated
96 hospitals, compared to 100 hospitals at December 31, 2017. Despite the decrease in the number of hospitals operated, our
patient days increased 0.9% to 1,012,368 days for the year ended December 31, 2018, compared to 1,003,161 days for the year
ended December 31, 2017 and our occupancy increased to 67% for the year ended December 31, 2018, compared to 66% for the
year ended December 31, 2017. Our net revenue per patient day increased 0.7% to $1,716 for the year ended December 31, 2018,
compared to $1,704 for the year ended December 31, 2017. The increase principally resulted from changes we experienced in our
non-Medicare net revenue per patient day during the year ended December 31, 2018.
Rehabilitation Hospital Segment. Net operating revenues increased 13.7% to $707.5 million for the year ended
December 31, 2018, compared to $622.5 million for the year ended December 31, 2017. The increase in net operating revenues
resulted primarily from an increase in patient volumes during the year ended December 31, 2018. Our patient days increased 16.9%
to 315,468 days for the year ended December 31, 2018, compared to 269,905 days for the year ended December 31, 2017. The
increase in patient days was principally attributable to the maturation of our rehabilitation hospitals which commenced operations
during 2016 and 2017. Our net revenue per patient day increased 1.8% to $1,606 for the year ended December 31, 2018, compared
to $1,577 for the year ended December 31, 2017. The increase principally resulted from changes we experienced in our non-
Medicare net revenue per patient day during the year ended December 31, 2018.
Outpatient Rehabilitation Segment. Net operating revenues increased 5.8% to $1,062.5 million for the year ended
December 31, 2018, compared to $1,003.8 million for the year ended December 31, 2017. Our net revenue per visit increased
2.0% to $103 for the year ended December 31, 2018, compared to $101 for the year ended December 31, 2017. Our net revenue
per visit benefited from improved contracted rates with some of our payors. Additionally, visits increased 1.5% to 8,356,018 for
the year ended December 31, 2018, compared to 8,232,536 visits for the year ended December 31, 2017. The increase in visits
resulted from both start-up and newly acquired outpatient rehabilitation clinics, as well as growth within our existing clinics.
During the year ended December 31, 2018, we also experienced an increase in net operating revenues related to management fees
and contracted labor services provided to entities in which we have made equity investments.
65
Concentra Segment. Net operating revenues increased 53.7% to $1,557.7 million for the year ended December 31, 2018,
compared to $1,013.2 million for the year ended December 31, 2017. The increase in net operating revenues was principally due
to the acquisition of U.S. HealthWorks on February 1, 2018, which contributed $488.8 million of net operating revenues during
the period. Visits in our centers increased 48.2% to 11,426,940 for the year ended December 31, 2018, compared to 7,709,508
visits for the year ended December 31, 2017. Net revenue per visit increased 7.8% to $124 for the year ended December 31, 2018,
compared to $115 for the year ended December 31, 2017. The increase in net revenue per visit was driven principally by U.S.
HealthWorks visits, which yield higher per visit rates, as well as an increase in workers’ compensation and employer services
reimbursement rates in our existing Concentra centers.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating
expenses were $4,462.3 million, or 87.8% of net operating revenues, for the year ended December 31, 2018, compared to $3,849.4
million, or 88.2% of net operating revenues, for the year ended December 31, 2017. Our cost of services, a major component of
which is labor expense, was $4,341.1 million, or 85.4% of net operating revenues, for the year ended December 31, 2018, compared
to $3,735.3 million, or 85.6% of net operating revenues, for the year ended December 31, 2017. The decrease in our operating
expenses relative to our net operating revenues was principally due to the performance of our rehabilitation hospital segment and
lower relative operating costs within our Concentra segment as a result of the U.S. HealthWorks acquisition. Facility rent expense
was $268.7 million for the year ended December 31, 2018, compared to $230.1 million for the year ended December 31, 2017.
The increase in our facility rent expense was primarily attributable to the acquisition of U.S. HealthWorks. General and
administrative expenses were $121.3 million, or 2.4% of net operating revenues, for the year ended December 31, 2018, compared
to $114.0 million, or 2.6% of net operating revenues, for the year ended December 31, 2017. General and administrative expenses
included $2.9 million and $2.8 million of U.S. HealthWorks acquisition costs for the years ended December 31, 2018 and 2017,
respectively.
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA was $243.0 million for the year ended December 31, 2018,
compared to $252.7 million for the year ended December 31, 2017. Our Adjusted EBITDA margin for the critical illness recovery
hospital segment was 13.9% for the year ended December 31, 2018, compared to 14.6% for the year ended December 31, 2017.
Our Adjusted EBITDA and Adjusted EBITDA margin were impacted by increases in employee costs and other operating costs,
relative to our net operating revenues, during the year ended December 31, 2018, as compared to the year ended December 31,
2017.
Rehabilitation Hospital Segment. Adjusted EBITDA increased 21.0% to $108.9 million for the year ended December 31,
2018, compared to $90.0 million for the year ended December 31, 2017. Our Adjusted EBITDA margin for the rehabilitation
hospital segment was 15.4% for the year ended December 31, 2018, compared to 14.5% for the year ended December 31, 2017.
The increases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were primarily driven
by increases in patient volume within our rehabilitation hospitals that commenced operations during 2016 and 2017, which allowed
our facilities to operate at lower relative costs compared to the prior period. The increases in Adjusted EBITDA and Adjusted
EBITDA margins also resulted from an increase in net revenue per patient day, as discussed above under “Net Operating Revenues.”
Adjusted EBITDA losses in our start-up hospitals were $4.7 million for the year ended December 31, 2018, compared to $7.5
million for the year ended December 31, 2017.
Outpatient Rehabilitation Segment. Adjusted EBITDA increased 7.1% to $142.0 million for the year ended December 31,
2018, compared to $132.5 million for the year ended December 31, 2017. Our Adjusted EBITDA margin for the outpatient
rehabilitation segment was 13.4% for the year ended December 31, 2018, compared to 13.2% for the year ended December 31,
2017. For the year ended December 31, 2018, our Adjusted EBITDA and Adjusted EBITDA margin increased as a result of an
increase in patient visits and net revenue per visit, as discussed above under “Net Operating Revenues.”
Concentra Segment. Adjusted EBITDA increased 59.9% to $252.0 million for the year ended December 31, 2018, compared
to $157.6 million for the year ended December 31, 2017. The increase in Adjusted EBITDA was principally due to the operating
results of U.S. HealthWorks, which we acquired on February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment
was 16.2% for the year ended December 31, 2018, compared to 15.6% for the year ended December 31, 2017. The increase in
Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S.
HealthWorks businesses.
Other. The Adjusted EBITDA loss was $100.8 million for the year ended December 31, 2018, compared to an Adjusted
EBITDA loss of $94.8 million for the year ended December 31, 2017. The increase in our Adjusted EBITDA loss was due to an
increase in general and administrative costs, which encompass our corporate shared service activities.
66
Depreciation and Amortization
Depreciation and amortization expense was $201.7 million for the year ended December 31, 2018, compared to $160.0
million for the year ended December 31, 2017. The increase principally occurred within our Concentra segment due to the
acquisition of U.S. HealthWorks.
Income from Operations
For the year ended December 31, 2018, we had income from operations of $417.3 million, compared to $355.9 million for
the year ended December 31, 2017. The increase in income from operations resulted principally from the growth of our Concentra
segment and the improved performance of our rehabilitation hospital segment, as discussed above.
Loss on Early Retirement of Debt
During the year ended December 31, 2018, we amended Select’s senior secured credit facilities and Concentra’s first lien
credit agreement which resulted in losses on early retirement of debt of $14.2 million. During the year ended December 31, 2017,
we refinanced Select’s senior secured credit facilities which resulted in a loss on early retirement of debt of $19.7 million.
Equity in Earnings of Unconsolidated Subsidiaries
Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority
owner. For the year ended December 31, 2018, we had equity in earnings of unconsolidated subsidiaries of $21.9 million, compared
to $21.1 million for the year ended December 31, 2017.
Non-Operating Gain
We recognized non-operating gains of $9.0 million for the year ended December 31, 2018. The non-operating gains were
principally attributable to the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries.
Interest Expense
Interest expense was $198.5 million for the year ended December 31, 2018, compared to $154.7 million for the year ended
December 31, 2017. The increase in interest expense was principally due to an increase in our indebtedness as a result of the
acquisition of U.S. HealthWorks.
Income Taxes
We recorded income tax expense of $58.6 million for the year ended December 31, 2018, which represented an effective
tax rate of 24.9%. We recorded an income tax benefit of $18.2 million for the year ended December 31, 2017. For the year ended
December 31, 2017, our income tax benefit resulted primarily from the effects of the federal tax reform legislation enacted on
December 22, 2017. The effects of the federal tax reform legislation on our net deferred tax liability resulted in an income tax
benefit of $71.5 million for the year ended December 31, 2017. Additionally, we were able to realize the benefit of a prior net
operating loss deduction of $14.1 million.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $39.1 million for the year ended December 31, 2018, compared to
$43.5 million for the year ended December 31, 2017. The decrease is principally due to a decrease in net income of our joint
venture subsidiary, Concentra. In 2017, Concentra experienced an increase in net income as a result of an income tax benefit
generated primarily from the effects of the federal tax reform legislation enacted on December 22, 2017.
67
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA,
depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated
subsidiaries, non-operating gain (loss), interest expense, income taxes, and net income attributable to non-controlling interests,
which, in each case, are the same for Holdings and Select.
Net Operating Revenues
Our net operating revenues increased 3.5% to $4,365.2 million for the year ended December 31, 2017, compared to $4,217.5
million for the year ended December 31, 2016.
Critical Illness Recovery Hospital Segment. Net operating revenues were $1,725.0 million for the year ended December 31,
2017, compared to $1,757.0 million for the year ended December 31, 2016. The decline in net operating revenues was principally
due to a decrease in patient days as a result of hospital closures. We had 1,003,161 patient days for the year ended December 31,
2017, compared to 1,041,074 days for the year ended December 31, 2016. The decline in net operating revenues attributable to a
decrease in patient days was offset in part by an increase in our net revenue per patient day. Our net revenue per patient day
increased 2.5% to $1,704 for the year ended December 31, 2017, compared to $1,663 for the year ended December 31, 2016. The
increase in net revenue per patient day was principally due to higher-acuity patient populations in our critical illness recovery
hospitals, which was caused by the changes in operations we made in response to Medicare patient criteria regulations.
Rehabilitation Hospital Segment. Net operating revenues increased 25.0% to $622.5 million for the year ended
December 31, 2017, compared to $498.1 million for the year ended December 31, 2016. The increase in net operating revenues
is principally due to several new rehabilitation hospitals which commenced operations during 2016 and 2017. Our patient days
increased 24.4% to 269,905 days for the year ended December 31, 2017, compared to 216,994 days for the year ended December 31,
2016. Our net revenue per patient day increased 9.4% to $1,577 for the year ended December 31, 2017, compared to $1,441 for
the year ended December 31, 2016.
Outpatient Rehabilitation Segment. Net operating revenues increased 2.5% to $1,003.8 million for the year ended
December 31, 2017, compared to $979.4 million for the year ended December 31, 2016. The increase in net operating revenues
was principally due to the acquisition of Physiotherapy on March 4, 2016, offset in part by the sale of our contract therapy businesses
on March 31, 2016. Visits increased 5.6% to 8,232,536 for the year ended December 31, 2017, compared to 7,799,208 visits for
the year ended December 31, 2016. The increase in visits was principally due to Physiotherapy. Net revenue per visit increased
1.0% to $101 for the year ended December 31, 2017, compared to $100 for the year ended December 31, 2016.
Concentra Segment. Net operating revenues increased 3.1% to $1,013.2 million for the year ended December 31, 2017,
compared to $982.5 million for the year ended December 31, 2016. The increase in net operating revenues was principally due
to newly acquired and developed centers. Visits in our centers increased 4.6% to 7,709,508 for the year ended December 31, 2017,
compared to 7,373,751 visits for the year ended December 31, 2016. The growth in visits principally related to an increase in
employer services visits. Net revenue per visit was $115 for the year ended December 31, 2017, compared to $116 for the year
ended December 31, 2016. The decrease in net revenue per visit is principally due to an increased proportion of employer service
visits, which yield lower per visit rates.
Operating Expenses
Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating
expenses were $3,849.4 million, or 88.2% of net operating revenues, for the year ended December 31, 2017, compared to $3,772.3
million, or 89.4% of net operating revenues, for the year ended December 31, 2016. Our cost of services, a major component of
which is labor expense, was $3,735.3 million, or 85.6% of net operating revenues, for the year ended December 31, 2017, compared
to $3,665.4 million, or 86.9% of net operating revenues, for the year ended December 31, 2016. The decrease in our operating
expenses relative to our net operating revenues is principally due to the improved operating performance of our start-up rehabilitation
hospitals and cost reductions achieved within our critical illness recovery hospital and Concentra segments. Facility rent expense
was $230.1 million for the year ended December 31, 2017, compared to $225.6 million for the year ended December 31, 2016.
General and administrative expenses were $114.0 million, or 2.6% of net operating revenues, for the year ended December 31,
2017, compared to $106.9 million, or 2.5% of net operating revenues, for the year ended December 31, 2016. General and
administrative expenses included $2.8 million of U.S. HealthWorks acquisition costs and $3.2 million of Physiotherapy acquisition
costs for the years ended December 31, 2017 and 2016, respectively.
68
Adjusted EBITDA
Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 12.5% to $252.7 million for the year ended
December 31, 2017, compared to $224.6 million for the year ended December 31, 2016. Our Adjusted EBITDA margin for the
critical illness recovery hospital segment was 14.6% for the year ended December 31, 2017, compared to 12.8% for the year ended
December 31, 2016. The increases in Adjusted EBITDA and Adjusted EBITDA margin are principally due to an increase in our
net revenue per patient day, as described above under “Net Operating Revenues,” while maintaining a consistent cost structure.
Rehabilitation Hospital Segment. Adjusted EBITDA increased 58.2% to $90.0 million for the year ended December 31,
2017, compared to $56.9 million for the year ended December 31, 2016. Our Adjusted EBITDA margin for the rehabilitation
hospital segment was 14.5% for the year ended December 31, 2017, compared to 11.4% for the year ended December 31, 2016.
The increases in Adjusted EBITDA and Adjusted EBITDA margin for our rehabilitation hospital segment were primarily driven
by increased patient volumes at our start-up rehabilitation hospitals, as discussed above under “Net Operating Revenues.” Adjusted
EBITDA losses in our start-up hospitals were $7.5 million for the year ended December 31, 2017, compared to $21.8 million for
the year ended December 31, 2016.
Outpatient Rehabilitation Segment. Adjusted EBITDA increased 2.1% to $132.5 million for the year ended December 31,
2017, compared to $129.8 million for the year ended December 31, 2016. The increase in Adjusted EBITDA was principally due
to growth in visits and an increase in net revenue per visit, as discussed above under “Net Operating Revenues.” Our Adjusted
EBITDA margin for the outpatient rehabilitation segment was 13.2% for the year ended December 31, 2017, compared to 13.3%
for the year ended December 31, 2016. During the year ended December 31, 2017, our Adjusted EBITDA margin for our outpatient
rehabilitation segment was impacted by higher relative labor expenses within markets which have experienced a decline in patient
volumes. We also experienced higher relative operating costs in some of our start-up and recently acquired outpatient rehabilitation
clinics.
Concentra Segment. Adjusted EBITDA increased 10.2% to $157.6 million for the year ended December 31, 2017,
compared to $143.0 million for the year ended December 31, 2016. Our Adjusted EBITDA margin for the Concentra segment
was 15.6% for the year ended December 31, 2017, compared to 14.6% for the year ended December 31, 2016. The increases in
Adjusted EBITDA and Adjusted EBITDA margin for our Concentra segment are principally due to an increase in net operating
revenues from newly acquired and developed centers, as described above under “Net Operating Revenues,” while leveraging our
existing cost structure.
Other. The Adjusted EBITDA loss was $94.8 million for the year ended December 31, 2017, compared to an Adjusted
EBITDA loss of $88.5 million for the year ended December 31, 2016. The increase in our Adjusted EBITDA loss was due to an
increase in general and administrative costs, which resulted from the expansion of our corporate shared services activities.
Depreciation and Amortization
Depreciation and amortization expense was $160.0 million for the year ended December 31, 2017, compared to $145.3
million for the year ended December 31, 2016. The increase principally occurred in our rehabilitation hospital segment due to
new hospitals operating within the segment.
Income from Operations
For the year ended December 31, 2017, we had income from operations of $355.9 million, compared to $299.8 million for
the year ended December 31, 2016. The increase in income from operations resulted principally from the increases in Adjusted
EBITDA, as described above.
Loss on Early Retirement of Debt
On March 6, 2017, we refinanced Select’s 2011 senior secured credit facility which resulted in losses on early retirement of
debt of $19.7 million during the year ended December 31, 2017.
On March 4, 2016, we refinanced a portion of our term loans under Select’s 2011 senior secured credit facility which resulted
in a loss on early retirement of debt of $0.8 million. On September 26, 2016, Concentra prepaid the second lien term loan under
the Concentra credit facilities, resulting in a loss on early retirement of debt of approximately $10.9 million.
Equity in Earnings of Unconsolidated Subsidiaries
For the year ended December 31, 2017, we had equity in earnings of unconsolidated subsidiaries of $21.1 million, compared
to $19.9 million for the year ended December 31, 2016. The increase in our equity in earnings of unconsolidated subsidiaries
resulted principally from the improved performance of rehabilitation businesses in which we own a minority interest.
69
Non-Operating Gain
We recognized a non-operating gain of $42.7 million for the year ended December 31, 2016. The non-operating gain was
principally due to the sale of our contract therapy businesses for $65.0 million, which resulted in a non-operating gain of
$33.9 million.
Interest Expense
Interest expense was $154.7 million for the year ended December 31, 2017, compared to $170.1 million for the year ended
December 31, 2016. The decrease in interest expense was principally the result of decreases in our interest rates associated with
the refinancing of Select’s 2011 senior secured credit facility during the quarter ended March 31, 2017, and the Concentra credit
facilities during the quarter ended September 30, 2016.
Income Taxes
We recorded an income tax benefit of $18.2 million for the year ended December 31, 2017. We recorded income tax expense
of $55.5 million for the year ended December 31, 2016, which represented an effective tax rate of 30.7%. For the year ended
December 31, 2017, our income tax benefit resulted primarily from the effects of the federal tax reform legislation enacted on
December 22, 2017. The effects of the federal tax reform legislation on our net deferred tax liability resulted in an income tax
benefit of $71.5 million for the year ended December 31, 2017. Additionally, we were able to realize the benefit of a prior net
operating loss deduction of $14.1 million.
On December 22, 2017 the Tax Cuts and Jobs Act was signed into law, which reduced the federal statutory tax rate to 21%
from 35%. Accounting Standards Codification 740, Income Taxes, requires the effects of changes in tax rates and laws on
deferred tax balances to be recognized in the period in which the legislation is enacted. While the effective date of the new
corporate tax rate was January 1, 2018, we recorded the effect on our deferred tax balances at December 31, 2017.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $43.5 million for the year ended December 31, 2017, compared to
$9.9 million for the year ended December 31, 2016. The increase is principally due to increases in net income of our joint venture
subsidiary, Concentra, and the improved operating performance of joint venture rehabilitation hospitals.
70
Liquidity and Capital Resources
Years Ended December 31, 2016, 2017, and 2018
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
For the Year Ended December 31,
2016
2017
2018
$
$
346,603
$
238,131
$
(554,320)
292,311
84,594
14,435
(192,965)
(21,646)
23,520
99,029
99,029
$
122,549
$
494,194
(697,137)
255,572
52,629
122,549
175,178
Operating activities provided $494.2 million of cash flows for the year ended December 31, 2018. The increase in operating
cash flows for the year ended December 31, 2018, when compared to the year ended December 31, 2017, was principally driven
by the change in our accounts receivable. Our days sales outstanding was 51 days at December 31, 2018, compared to 58 days at
December 31, 2017. At December 31, 2017, the higher days sales outstanding was caused by the significant underpayments we
received through the Medicare periodic interim payment program in our critical illness recovery hospitals. Additionally, we received
over-payments during 2016 which were repaid during the first quarter of 2017. This had the effect of increasing operating activity
cash flows during 2016 and decreasing operating activity cash flows during 2017.
Operating activities provided $238.1 million of cash flows for the year ended December 31, 2017. The decrease in operating
cash flows for the year ended December 31, 2017, when compared to the year ended December 31, 2016, was principally driven
by an increase in our accounts receivable during the year ended December 31, 2017, as described above. Our days sales outstanding
was 58 days at December 31, 2017, compared to 51 days at December 31, 2016.
Investing activities used $697.1 million, $193.0 million and $554.3 million of cash flows for the years ended December 31,
2018, 2017 and 2016, respectively. For the year ended December 31, 2018, the principal uses of cash were $515.6 million related
to the acquisition of U.S. HealthWorks and $167.3 million for purchases of property and equipment. For the year ended
December 31, 2017, the principal uses of cash were $233.2 million for purchases of property and equipment and $27.4 million
for the acquisition of businesses, offset in part by $80.4 million of proceeds received from the sale of assets. For the year ended
December 31, 2016, the principal uses of cash were $406.3 million for the Physiotherapy acquisition and $161.6 million for
purchases of property and equipment, offset in part by $80.5 million of proceeds received from the sale of assets and businesses.
Financing activities provided $255.6 million of cash flows for the year ended December 31, 2018. The principal source of
cash was from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.8 million.
This was offset in part by $311.5 million of distributions to and purchases of non-controlling interests, of which $294.9 million
related to the redemption and reorganization transactions executed under the Purchase Agreement in connection with the acquisition
of U.S. HealthWorks by our Concentra segment, and $210.0 million of net repayments under the Select revolving credit facility.
Financing activities used $21.6 million of cash flows for the year ended December 31, 2017. The principal uses of cash were
$23.1 million for a principal prepayment associated with the Concentra credit facilities, $8.6 million for term loan payments
associated with the Select credit facilities, and cash used for the payment of financing costs related to the refinancing of the Select
credit facilities, offset in part by $10.0 million of net borrowings under the Select revolving facility.
Financing activities provided $292.3 million of cash flows for the year ended December 31, 2016. The principal source of
cash was the issuance of $625.0 million series F tranche B term loans under Select’s 2011 senior secured credit facility, resulting
in net proceeds of $600.1 million. This was offset by $215.7 million of cash used to repay the series D tranche B term loans under
Select’s 2011 senior secured credit facility and $80.0 million of net repayments under the Select and Concentra revolving facilities.
71
Capital Resources
Working capital. We had net working capital of $287.3 million at December 31, 2018, compared to net working capital
of $315.4 million at December 31, 2017.
Select credit facilities. On March 22, 2018, Select entered into Amendment No. 1 to the Select credit agreement dated
March 6, 2017. Amendment No. 1 (i) decreased the applicable interest rate on the Select term loan from the Adjusted LIBO Rate
(as defined in the Select credit agreement and subject to an Adjusted LIBO floor of 1.00%) plus 3.50% to the Adjusted LIBO Rate
plus a percentage ranging from 2.50% to 2.75%, or from the Alternate Base Rate (as defined in the Select credit agreement and
subject to an Alternate Base Rate floor of 2.00%) plus 2.50% to the Alternate Base Rate plus a percentage ranging from 1.50% to
1.75%, in each case subject to a specified leverage ratio; (ii) decreased the applicable interest rate on the loans outstanding under
the Select revolving facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% to the Adjusted LIBO
Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternate Base Rate plus a percentage ranging from 2.00% to
2.25% to the Alternate Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case subject to a specified leverage
ratio; (iii) extended the maturity date for the Select term loan from March 6, 2024, to March 6, 2025; and (iv) made certain other
technical amendments to the Select credit agreement as set forth therein.
On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement. Among other things, Amendment
No. 2 (i) decreased the applicable interest rate on the Select term loan from the Adjusted LIBO Rate (as defined in the Select credit
agreement) plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to
2.50%, or from the Alternate Base Rate (as defined in the Select credit agreement) plus a percentage ranging from 1.50% to 1.75%
to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified leverage ratio (as
defined in the Select credit agreement), and (ii) decreased the applicable interest rate on the loans outstanding under the Select
revolving facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate plus
a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate (as defined in the Select credit agreement) plus a
percentage ranging from 1.50% to 1.75% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case
subject to a specified leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement
are no longer subject to the floor.
At December 31, 2018, Select had outstanding borrowings under the Select credit facilities consisting of a $1,129.9 million
Select term loan (excluding unamortized original issue discounts and debt issuance costs of $19.0 million) and borrowings of
$20.0 million (excluding letters of credit) under the Select revolving facility. At December 31, 2018, Select had $392.5 million of
availability under the Select revolving facility after giving effect to $37.5 million of outstanding letters of credit.
The Select credit agreement requires Select to maintain certain leverage ratios, as defined in the Select credit agreement.
For each of the four fiscal quarters during the year ended December 31, 2018, Select was required to maintain its leverage ratio
at less than 6.25 to 1.00. As of December 31, 2018, Select’s leverage ratio was 4.64 to 1.00. Additionally, the Select credit agreement
will require a prepayment of borrowings of 50% of excess cash flow, which will result in a prepayment of approximately $98.8
million for the year ended December 31, 2018. The Company expects to have the borrowing capacity and intends to use borrowings
under the Select revolving facility to make all or a portion of the required prepayment during the quarter ended March 31, 2019.
Concentra credit facilities. Select and Holdings are not parties to the Concentra credit facilities and are not obligors with
respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select, it is included in Select’s consolidated
financial statements.
On February 1, 2018, in connection with the acquisition of U.S. HealthWorks, Concentra entered into Amendment No. 3 to
the Concentra first lien credit agreement. Among other things, Amendment No. 3 (i) provided for an additional $555.0 million in
first lien term loans that, along with the existing first lien term loan under the Concentra first lien credit agreement, have a maturity
date of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) added an additional $25.0 million of revolving
loans, that along with the existing $50.0 million revolving loans, comprise the five-year Concentra revolving facility under the
terms of the existing Concentra first lien credit agreement. Prior to subsequent amendments, the Concentra first lien term loan’s
interest rate was equal to the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 2.75% (subject to
an Adjusted LIBO Rate floor of 1.00%), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus
1.75% (subject to an Alternate Base Rate floor of 2.00%). All other material terms and conditions applicable to the original first
lien term loan commitments were applicable to the additional first lien term loans created under the Concentra first lien credit
agreement.
72
In addition, Concentra entered into the Concentra second lien credit agreement that provided for $240.0 million in term loans
(the “Concentra second lien term loan”) with a maturity date of June 1, 2023. Borrowings under the Concentra second lien credit
agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined in the Concentra second lien credit agreement) plus
6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or the Alternate Base Rate (as defined in the Concentra second lien
credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
In the event that, on or prior to February 1, 2019, Concentra voluntarily prepays any of the Concentra second lien term loan
or refinances such term loans with net proceeds of other indebtedness, Concentra will pay a premium of 2.00% of the aggregate
principal amount of the Concentra second lien term loan prepaid. If, on or prior to February 1, 2020, Concentra voluntarily prepays
any of the Concentra second lien term loan or refinances such term loans with net proceeds of other indebtedness, Concentra will
pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.
On October 26, 2018, Concentra entered into Amendment No. 4 to the Concentra first lien credit agreement. Among other
things, Amendment No. 4 (i) provides for an applicable interest rate on the Concentra first lien term loan of the Adjusted LIBO
Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from 2.50% to 2.75% (with 2.75% being
the initial rate), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus a percentage ranging from
1.50% to 1.75% (with 1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decreases the applicable
interest rate on the loans outstanding under the Concentra revolving facility from the Adjusted LIBO Rate plus a percentage ranging
from 2.75% to 3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate
plus a percentage ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in
each case subject to Concentra’s leverage ratio (as defined in the Concentra first lien credit agreement). As amended, the Adjusted
LIBO Rate and Alternate Base Rate under the Concentra first lien credit agreement are no longer subject to a floor.
Concentra will be required to prepay borrowings under the Concentra second lien term loan with (i) 100% of the net cash
proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject
to reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens, (ii) 100% of
the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50%
of excess cash flow (as defined in the Concentra second lien credit agreement) if Concentra’s leverage ratio is greater than 4.25
to 1.00 and 25% of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to
1.00, in each case, reduced by the aggregate amount of term loans and certain debt optionally prepaid during the applicable fiscal
year and the aggregate amount of revolving commitments reduced permanently during the applicable fiscal year (other than in
connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s leverage
ratio is less than or equal to 3.75 to 1.00. No mandatory prepayment is required under the Concentra second lien credit agreement
to the extent any mandatory prepayment is applied to indebtedness secured by liens ranking prior to the Concentra second lien
credit agreement (and to the extent such debt is revolving indebtedness, such prepayment is accompanied by a permanent reduction
of the applicable commitments).
The Concentra second lien credit agreement also contains a number of affirmative and restrictive covenants, including
limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate
transactions; and dividends and restricted payments. The Concentra second lien credit agreement contains events of default for
non-payment of principal and interest when due (subject to a grace period for interest), cross-default and cross-acceleration
provisions, and an event of default that would be triggered by a change of control.
The borrowings under the Concentra second lien term loan are guaranteed, on a second lien basis, by Concentra Holdings,
Inc., Concentra, and certain domestic subsidiaries of Concentra (subject, in each case, to permitted liens). These borrowings will
also be guaranteed by certain of Concentra’s future domestic subsidiaries (other than Excluded Subsidiaries and Consolidated
Practices, each as defined in the Concentra second lien credit agreement). The borrowings under the Concentra second lien term
loan are secured by substantially all of Concentra’s and its domestic subsidiaries’ existing and future property and assets and by
a pledge of Concentra’s capital stock, the capital stock of certain of Concentra’s domestic subsidiaries and up to 65% of the voting
capital stock and 100% of the non-voting capital stock of Concentra’s foreign subsidiaries, if any.
Concentra used borrowings under the Concentra first lien credit agreement and the Concentra second lien credit agreement,
together with cash on hand, to pay the cash purchase price for all of the issued and outstanding stock of U.S. HealthWorks to
DHHC and to finance the redemption and reorganization transactions executed under the Purchase Agreement.
At December 31, 2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of the $1,414.2
million Concentra term loans (excluding unamortized discounts and debt issuance costs of $21.4 million). Concentra did not have
any borrowings under the Concentra revolving facility. At December 31, 2018, Concentra had $62.3 million of availability under
its revolving facility after giving effect to $12.7 million of outstanding letters of credit.
73
The Concentra first lien credit agreement will require a prepayment of borrowings of 50% of excess cash flow, which will
result in a prepayment of approximately $33.9 million for the year ended December 31, 2018. Concentra expects to use cash on
hand to make all or a portion of the required prepayment during the quarter ended March 31, 2019.
Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase program to repurchase
up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, 2019, and will
remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this
program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings
deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. Holdings
did not repurchase shares during the year ended December 31, 2018. Since the inception of the program through December 31,
2018, Holdings has repurchased 35,924,128 shares at a cost of approximately $314.7 million, or $8.76 per share, which includes
transaction costs.
Liquidity. We believe our internally generated cash flows and borrowing capacity under the Select and Concentra credit
facilities will be sufficient to finance operations over the next twelve months. We may from time to time seek to retire or purchase
our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated
transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other
sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
The amounts involved may be material.
Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with
significant health systems and other healthcare providers and from time to time we may also develop new rehabilitation hospitals
and occupational health centers. We also intend to open new outpatient rehabilitation clinics in local areas that we currently serve
where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our
development activities, we may grow through opportunistic acquisitions.
Commitments and Contingencies
The following contractual obligation table summarizes our contractual obligations and the effect such obligations are expected
to have on liquidity and cash flow in future periods.
Debt(1)
Interest(2)(3)
Letters of credit outstanding(1)
Purchase obligations(4)(5)
Construction contracts(6)
Operating leases(6)
Related party operating leases(6)
Total contractual cash obligations(7)
Total
2019
2020 - 2022
2023 - 2024
After 2024
(in thousands)
$
3,338,381
$
43,865
$
1,996,077
$
264,451
$
1,033,988
725,881
50,191
223,054
21,616
1,390,023
44,641
179,246
425,215
111,121
10,299
—
122,112
21,616
261,915
5,931
50,191
72,152
—
552,548
22,473
—
24,710
—
182,011
5,527
—
4,080
—
393,549
10,710
$
5,793,787
$
634,685
$
3,118,656
$
587,820
$
1,452,626
_______________________________________________________________________________
(1)
See Note 9 – Long-Term Debt and Notes Payable of the notes to our consolidated financial statements included herein.
(2)
(3)
(4)
The interest obligation for the Select credit facilities was calculated using the average interest rate of 4.9% for the Select
term loan and 5.1% for the Select revolving facility at December 31, 2018. The interest obligation for the 6.375% senior
notes was calculated using the stated interest rate and a weighted average interest rate of 4.0% was used for Select’s other
debt obligations.
The interest obligation for the Concentra credit facilities was calculated using the average interest rate of 4.8% for the
Concentra first lien term loan and 8.5% for the Concentra second lien term loan at December 31, 2018. The weighted
average interest rate for Concentra’s other debt obligations was 7.0%.
Amounts represent purchase commitments that are not presented as construction contract commitments above. Our
purchase obligations primarily relate to software licensing and support.
74
(5)
(6)
(7)
Amounts include the $63.0 million purchase price related to an asset purchase agreement (the “Asset Purchase
Agreement”), executed on December 26, 2018, with Promise Hospital of Florida at the Villages, Inc., HLP Properties at
the Villages, L.L.C., Promise Properties of Lee, Inc., Promise Hospital of Lee, Inc., Promise Hospital of Dade, Inc., and
Promise Properties of Dade, Inc. (“Promise Healthcare”), pursuant to which we will purchase substantially all of the
assets of certain of Promise Healthcare’s Florida hospitals. The purchase price is subject to certain adjustments. The sale
is subject to other conditions, including approval of the Asset Purchase Agreement by the Bankruptcy Court for the
District of Delaware.
See Note 17 – Commitments and Contingencies of the notes to our consolidated financial statements included herein.
Workers’ compensation and professional malpractice liability insurance liabilities of $112.9 million, which are included
as components of other non-current liabilities on the consolidated balance sheets, have been excluded from the table
above as we cannot reasonably estimate the amounts or periods in which these liabilities will be paid.
Concentra Put Right
Pursuant to the Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, WCAS
and the other members of Concentra Group Holdings Parent and Dignity Health have separate put rights (each, a “Put Right”)
with respect to their equity interests in Concentra Group Holdings Parent. If a Put Right is exercised by WCAS or Dignity Health,
Select will be obligated to purchase up to 331/3% of the equity interests of Concentra Group Holdings Parent offered by WCAS,
DHHC, or the other members, that such members owned as of February 1, 2018, at a purchase price based on a valuation of
Concentra Group Holdings Parent performed by an investment bank to be agreed between Select and one of WCAS or Dignity
Health, which valuation will be based on certain precedent transactions using multiples of EBITDA (as defined in the Amended
and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent) and capped at an agreed upon multiple
of EBITDA. Select has the right to elect to pay the purchase price in cash or in shares of Holdings’ common stock. WCAS and
Dignity Health may first exercise their respective Put Right during a sixty-day period commencing February 1, 2020, and then
may exercise their respective Put Right again annually during a sixty-day period in each calendar year thereafter. If WCAS exercises
its Put Right, the other members of Concentra Group Holdings Parent, other than Dignity Health, may elect to sell to Select, on
the same terms as WCAS, a percentage of their equity interests of Concentra Group Holdings Parent that such member owned as
of the date of the Amended and Restated LLC Agreement, up to but not exceeding the percentage of equity interests owned by
WCAS as of February 1, 2018 that WCAS has determined to sell to Select in the exercise of its Put Right.
Furthermore, WCAS, Dignity Health, and the other members of Concentra Group Holdings Parent have a put right with
respect to their equity interest in Concentra Group Holdings Parent that may only be exercised in the event Holdings or Select
experiences a change of control that has not been previously approved by WCAS and Dignity Health, and which results in change
in the senior management of Select (an “SEM COC Put Right”). If an SEM COC Put Right is exercised by WCAS, Select will be
obligated to purchase all (but not less than all) of the equity interests of WCAS and the other members of Concentra Group Holdings
Parent (other than Dignity Health) offered by such members at a purchase price based on a valuation of Concentra Group Holdings
Parent performed by an investment bank to be agreed between Select and one of WCAS or Dignity Health, which valuation will
be based on certain precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA. Similarly,
if an SEM COC Put Right is exercised by Dignity Health, Select will be obligated to purchase all (but not less than all) of the
equity interests of Dignity Health at a purchase price based on a valuation of Concentra Group Holdings Parent performed by an
investment bank to be agreed between Select and one of WCAS or Dignity Health, which valuation will be based on certain
precedent transactions using multiples of EBITDA and capped at an agreed upon multiple of EBITDA.
Furthermore, Select has a call right (the “Call Right”), whereby each other member of Concentra Group Holdings Parent
will be obligated to sell all or a portion of their equity interests in Concentra Group Holdings Parent to Select at a purchase price
based on a valuation of Concentra Group Holdings performed by an investment bank to be mutually agreed upon by Select and
either WCAS or Dignity Health. The valuation will be based on certain precedent transactions using multiples of EBITDA and
capped at an agreed upon multiple of EBITDA. Select may first exercise the Call Right after February 1, 2022.
We exclude the approximate amount that we may be required to pay to purchase these equity interests in Concentra Group
Holdings Parent from the contractual obligations table above because of the uncertainty as to: (i) whether or not the Put Right, if
exercisable, or the Call Right will actually be exercised; (ii) the dollar amounts that would be paid if the Put Right or Call Right
is exercised; and (iii) the timing and form of consideration of any such payments.
75
Effects of Inflation and Changing Prices
We derive a substantial portion of our revenues from the Medicare program. We have been, and could be in the future,
affected by the continuing efforts of governmental and private third-party payors to contain healthcare costs by limiting or reducing
reimbursement payments.
Additionally, reimbursement payments under governmental and private third-party payor programs may not increase to
sufficiently cover increasing costs. Medicare reimbursement in our critical illness recovery hospitals and rehabilitation hospitals
is subject to fixed payments under the Medicare prospective payment systems. In accordance with Medicare laws, CMS makes
annual adjustments to Medicare payments under what is commonly known as a “market basket update.” Generally, these rates are
adjusted for inflation. However, these adjustments may not reflect the actual increase in the costs of providing healthcare services
and may be reduced by CMS for other adjustments.
The healthcare industry is labor intensive and the Company’s largest expenses are labor related costs. Wage and other
expenses increase during periods of inflation and when labor shortages occur in the marketplace. There can be no guarantee we
will not experience increases in the cost of labor, as the need for clinical healthcare professionals is expected to grow. In addition,
suppliers pass along rising costs to us in the form of higher prices. We have little or no ability to pass on these increased costs
associated with providing services due to federal laws that establish fixed reimbursement rates.
Recent Accounting Pronouncements
Refer to Note 1 – Organization and Significant Accounting Policies of the notes to our consolidated financial statements
included herein for information regarding recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate
exposure relates to the loans outstanding under the Select credit facilities and Concentra credit facilities.
As of December 31, 2018, Select had outstanding borrowings under the Select credit facilities consisting of a $1,129.9
million Select term loan (excluding unamortized discounts and debt issuance costs of $19.0 million) and borrowings of $20.0
million (excluding letters of credit) under the Select revolving facility, which bear interest at variable rates.
As of December 31, 2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of the
$1,414.2 million Concentra term loans (excluding unamortized discounts and debt issuance costs of $21.4 million), which bear
interest at variable rates. Concentra did not have any borrowings under the Concentra revolving facility.
As of December 31, 2018, each 0.25% increase in market interest rates will impact the interest expense on Select’s and
Concentra’s variable rate debt by $6.4 million per annum.
Item 8. Financial Statements and Supplementary Data.
See Consolidated Financial Statements and Notes thereto commencing at Page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
76
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation,
our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the
accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to
allow timely decisions regarding disclosure, are effective as of December 31, 2018 to provide reasonable assurance that material
information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time
periods specified in the relevant SEC rules and forms.
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. SEC guidance permits management to
omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal
control over financial reporting for a period not to exceed one year from the date of the acquisition.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange
Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that
occurred during the fourth quarter of the year ended December 31, 2018 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
On February 1, 2018, Concentra consummated the acquisition of U.S. HealthWorks. Effective from that date, we began
integrating U.S. HealthWorks into our existing control procedures. The U.S. HealthWorks integration may lead us to modify certain
controls in future periods, but we do not expect changes to significantly affect our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over our financial
reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria of “Internal Control—
Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or “COSO,”
as of December 31, 2018. Our system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
As of December 31, 2018, the operations and related assets of U.S. HealthWorks are excluded from management’s assessment
of internal control over financial reporting because it was acquired by Concentra during 2018. U.S. HealthWorks’ acquired assets
(excluding its goodwill and intangible assets) represented less than 3% of our total assets as of December 31, 2018. U.S.
HealthWorks’ net operating revenues represented less than 10% of our consolidated net operating revenues for the year ended
December 31, 2018.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
77
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018.
This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control—
Integrated Framework (2013)” issued by COSO. Based on this assessment, management concludes that, as of December 31, 2018,
internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The effectiveness
of
internal control over financial reporting as of December 31, 2018 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm as stated in their report which appears herein.
the Company’s
Item 9B. Other Information.
None.
78
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information regarding directors and nominees for directors of the Company, including identification of the audit
committee and audit committee financial expert, and Compliance with Section 16(a) of the Exchange Act is presented under the
headings “Corporate Governance—Committees of the Board of Directors,” “Election of Directors—Directors and Nominees”
and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for use in connection
with the 2019 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed within 120 days after the end of the Company’s
fiscal year ended December 31, 2018. The information contained under these headings is incorporated herein by reference.
Information regarding the executive officers of the Company is included in this Annual Report on Form 10-K under Item 1 of
Part I as permitted by Instruction 3 to Item 401(b) of Regulation S-K.
We have adopted a written code of business conduct and ethics, known as our Code of Conduct, which applies to all of our
directors, officers, and employees, as well as a Code of Ethics applicable to our senior financial officers, including our Chief
Executive Officer, our Chief Financial Officer and our Chief Accounting Officer. Our Code of Conduct and Code of Ethics for
senior financial officers are available on our website, www.selectmedicalholdings.com. Our Code of Conduct and Code of Ethics
for senior financial officers may also be obtained by contacting investor relations at (717) 972-1100. Any amendments to our
Code of Conduct or Code of Ethics for senior financial officers or waivers from the provisions of the codes for our Chief Executive
Officer, our Chief Financial Officer and our Chief Accounting Officer will be disclosed on our website promptly following the
date of such amendment or waiver.
Item 11. Executive Compensation.
Information concerning executive compensation is presented under the headings “Executive Compensation” and
“Compensation Committee Report” in the Proxy Statement. The information contained under these headings is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain beneficial owners and management is set forth under the heading
“Security Ownership of Certain Beneficial Owners and Directors and Officers” in the Proxy Statement. The information contained
under this heading is incorporated herein by reference.
Equity Compensation Plan Information
Set forth in the table below is a list of all of our equity compensation plans and the number of securities to be issued on
exercise of equity rights, average exercise price, and number of securities that would remain available under each plan if outstanding
equity rights were exercised as of December 31, 2018.
Plan Category
Equity compensation plans approved by security holders:
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))(c)
Select Medical Holdings Corporation 2005 Equity Incentive Plan
105,000
$
Select Medical Holdings Corporation 2011 Equity Incentive Plan
Director Equity Incentive Plan
Select Medical Holdings Corporation 2016 Equity Incentive Plan
Equity compensation plans not approved by security holders
—
—
—
—
9.18
—
—
—
—
— (1)
— (2)
— (2)
3,184,185
—
_____________________________________________________________________________
(1)
In connection with the approval of the Select Medical Holdings Corporation 2011 Equity Incentive Plan, we no longer
issue awards under the Select Medical Holdings Corporation 2005 Equity Incentive Plan.
(2)
In connection with the approval of the Select Medical Holdings Corporation 2016 Equity Incentive Plan, as amended,
we no longer issue awards under the Select Medical Holdings 2011 Equity Incentive Plan and the Director Equity
Incentive Plan.
79
Item 13. Certain Relationships, Related Transactions and Director Independence.
Information concerning related transactions is presented under the heading “Certain Relationships, Related Transactions
and Director Independence” in the Proxy Statement. The information contained under this heading is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services.
Information concerning principal accountant fees and services is presented under the heading “Ratification of Appointment
of Independent Registered Public Accounting Firm” in the Proxy Statement. The information contained under this heading is
incorporated herein by reference.
80
Item 15. Exhibits and Financial Statement Schedules.
a. The following documents are filed as part of this report:
PART IV
i.
Financial Statements: See Index to Financial Statements appearing on page F-1 of this report.
ii. Financial Statement Schedule: See Schedule II—Valuation and Qualifying Accounts appearing on page F-57
of this report.
iii. The following exhibits are filed as part of, or incorporated by reference into, this report:
Number
Description
2.1 Equity Purchase and Contribution Agreement, by and among Dignity Health Holding Corporation, U.S. HealthWorks,
Inc., Concentra Group Holdings, LLC, Concentra Inc. and Concentra Group Holdings Parent, LLC, dated October
22, 2017, incorporated herein by reference to Exhibit 2.1 of the Current Report on Form 8-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on October 23, 2017 (Reg. Nos. 001-34465 and
001-31441).
3.1 Amended and Restated Certificate of Incorporation of Select Medical Corporation, incorporated by reference to
Exhibit 3.1 of Select Medical Corporation’s Form S-4 filed June 15, 2005 (Reg. No. 001-31441).
3.2 Form of Restated Certificate of Incorporation of Select Medical Holdings Corporation, incorporated by reference
to Exhibit 3.3 of Select Medical Holdings Corporation’s Form S-1/A filed September 21, 2009 (Reg
No. 333-152514).
3.3 Amended and Restated Bylaws of Select Medical Corporation, incorporated herein by reference to Exhibit 3.2 of
the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed
on October 30, 2014 (Reg. Nos. 001-34465 and 001-31441).
3.4 Amended and Restated Bylaws of Select Medical Holdings Corporation, as amended, incorporated herein by
reference to Exhibit 3.4 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select
Medical Corporation filed on February 26, 2016 (Reg. Nos. 001-34465 and 001-31441).
4.1
Indenture, dated as of May 28, 2013, by and among Select Medical Holdings Corporation, the guarantors named
therein and U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Current
Report on Form 8-K of Select Medical Holdings Corporation on May 28, 2013 (Reg. No. 001-34465).
4.2 Forms of 6.375% Senior Notes due 2021, incorporated herein by reference to Exhibit 4.2 of the Current Report on
Form 8-K of Select Medical Holdings Corporation on May 28, 2013 (Reg. No. 001-34465).
4.3 Supplemental Indenture, dated as of March 11, 2014, by and among the Company, the guarantors named therein and
U.S. Bank National Association, as trustee, incorporated herein by reference to Exhibit 4.1 of the Current Report on
Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 11, 2014 (Reg.
Nos. 001-34465 and 001-31441).
10.1 Employment Agreement, dated as of March 1, 2000, between Select Medical Corporation and Rocco A. Ortenzio,
incorporated by reference to Exhibit 10.16 of Select Medical Corporation’s Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
10.2 Amendment No. 1 to Employment Agreement, dated as of August 8, 2000, between Select Medical Corporation and
Rocco A. Ortenzio, incorporated by reference to Exhibit 10.17 of Select Medical Corporation’s Registration
Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.3 Amendment No. 2 to Employment Agreement, dated as of February 23, 2001, between Select Medical Corporation
and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.47 of Select Medical Corporation’s Registration
Statement on Form S-1 March 30, 2001 (Reg. No. 333-48856).
10.4 Amendment No. 3 to Employment Agreement, dated as of April 24, 2001, between Select Medical Corporation and
Rocco A. Ortenzio, incorporated by reference to Exhibit 10.50 of Select Medical Corporation’s Registration
Statement on Form S-4 filed June 26, 2001 (Reg. No. 333-63828).
10.5 Amendment No. 4 to Employment Agreement, dated as of September 17, 2001, between Select Medical Corporation
and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.52 of Select Medical Corporation’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499).
10.6 Amendment No. 5 to Employment Agreement, dated as of February 24, 2005, between Select Medical Corporation
and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.10 of Select Medical Corporation’s Form S-4 filed
June 16, 2005 (Reg. No. 333-125846).
10.7 Employment Agreement, dated as of March 1, 2000, between Select Medical Corporation and Robert A. Ortenzio,
incorporated by reference to Exhibit 10.14 of Select Medical Corporation’s Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
81
Number
Description
10.8 Amendment No. 1 to Employment Agreement, dated as of August 8, 2000, between Select Medical Corporation and
Robert A. Ortenzio, incorporated by reference to Exhibit 10.15 of Select Medical Corporation’s Registration
Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.9 Amendment No. 2 to Employment Agreement, dated as of February 23, 2001, between Select Medical Corporation
and Robert A. Ortenzio, incorporated by reference to Exhibit 10.48 of Select Medical Corporation’s Registration
Statement on Form S-1 filed March 30, 2001 (Reg. No. 333-48856).
10.10 Amendment No. 3 to Employment Agreement, dated as of September 17, 2001, between Select Medical Corporation
and Robert A. Ortenzio, incorporated by reference to Exhibit 10.53 of Select Medical Corporation’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499).
10.11 Amendment No. 4 to Employment Agreement, dated as of December 10, 2004, between Select Medical Corporation
and Robert A. Ortenzio, incorporated by reference to Exhibit 99.3 of Select Medical Corporation’s Current Report
on Form 8-K filed December 16, 2004 (Reg. No. 001-31441).
10.12 Amendment No. 5 to Employment Agreement, dated as of February 24, 2005, between Select Medical Corporation
and Robert A. Ortenzio, incorporated by reference to Exhibit 10.16 of Select Medical Corporation’s Form S-4 filed
June 16, 2005 (Reg. No. 333-125846).
10.13 Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation and Martin F. Jackson,
incorporated by reference to Exhibit 10.11 of Select Medical Corporation’s Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
10.14 Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select Medical Corporation
and Martin F. Jackson, incorporated by reference to Exhibit 10.52 of Select Medical Corporation’s Registration
Statement on Form S-1 filed March 30, 2001 (Reg. No. 333-48856).
10.15 Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between Select Medical
Corporation and Martin F. Jackson, incorporated by reference to Exhibit 10.24 of Select Medical Corporation’s
Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
10.16 Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation and Michael E.
Tarvin, incorporated by reference to Exhibit 10.22 of Select Medical Corporation’s Registration Statement on
Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.17 Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select Medical Corporation
and Michael E. Tarvin, incorporated by reference to Exhibit 10.54 of Select Medical Corporation’s Registration
Statement on Form S-1 filed March 30, 2001 (Reg. No. 333-48856).
10.18 Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between Select Medical
Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.39 of Select Medical Corporation’s
Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
10.19 Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation and Scott A.
Romberger, incorporated by reference to Exhibit 10.56 of Select Medical Corporation’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499).
10.20 Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select Medical Corporation
and Scott A. Romberger, incorporated by reference to Exhibit 10.57 of Select Medical Corporation’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499).
10.21 Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between Select Medical
Corporation and Scott A. Romberger, incorporated by reference to Exhibit 10.42 of Select Medical Corporation’s
Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
10.22 Form of Unit Award Agreement, incorporated by reference to Exhibit 10.54 of Select Medical Holdings Corporation’s
Form S-1 filed July 24, 2008 (Reg. No. 333-152514).
10.23 Office Lease Agreement, dated as of June 17, 1999, between Select Medical Corporation and Old Gettysburg
Associates III, incorporated by reference to Exhibit 10.27 of Select Medical Corporation’s Registration Statement
on Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
10.24 First Addendum to Lease Agreement, dated as of April 25, 2008, between Old Gettysburg Associates III and Select
Medical Corporation, incorporated by reference to Exhibit 10.65 of Select Medical Holdings Corporation’s Form S-1
filed July 24, 2008 (Reg. No. 333-152514).
10.25 Second Addendum to Lease Agreement, dated as of November 1, 2012, between Old Gettysburg Associates III LP
and Select Medical Corporation, incorporated by reference to Exhibit 10.37 of the Annual Report on Form 10-K of
Select Medical Holdings Corporation and Select Medical Corporation filed on February 26, 2013 (Reg.
Nos. 001-34465 and 001-31441).
10.26 Office Lease Agreement, dated August 25, 2006, between Old Gettysburg Associates IV, L.P. and Select Medical
Corporation, incorporated by reference to Exhibit 10.1 of Select Medical Corporation’s Quarterly Report on Form 10-
Q for the quarter ended September 30, 2006 (Reg. No. 001-31441).
82
Number
Description
10.27 First Addendum to Lease Agreement, dated as of November 1, 2012, between Old Gettysburg Associates IV LP and
Select Medical Corporation, incorporated by reference to Exhibit 10.39 of the Annual Report on Form 10-K of Select
Medical Holdings Corporation and Select Medical Corporation filed on February 26, 2013 (Reg. Nos. 001-34465
and 001-31441).
10.28 Office Lease Agreement, dated November 1, 2012, by and between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.40 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on February 26, 2013 (Reg. Nos. 001-34465 and
001-31441).
10.29 Office Lease Agreement, dated November 1, 2012, by and between Select Medical Corporation and Old Gettysburg
Associates II, LP, incorporated by reference to Exhibit 10.41 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on February 26, 2013 (Reg. Nos. 001-34465 and
001-31441).
10.30 Naming, Promotional and Sponsorship Agreement, dated as of October 1, 1997, between NovaCare, Inc. and the
Philadelphia Eagles Limited Partnership, assumed by Select Medical Corporation in a Consent and Assumption
Agreement dated November 19, 1999 by and among NovaCare, Inc., Select Medical Corporation and the Philadelphia
Eagles Limited Partnership, incorporated by reference to Exhibit 10.36 of Select Medical Corporation’s Registration
Statement on Form S-1 filed December 7, 2000 (Reg. No. 333-48856).
10.31 First Amendment to Naming, Promotional and Sponsorship Agreement, dated as of January 1, 2004, between Select
Medical Corporation and Philadelphia Eagles, LLC, incorporated by reference to Exhibit 10.63 of Select Medical
Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
10.32 Select Medical Holdings Corporation 2005 Equity Incentive Plan, as amended and restated, incorporated by reference
to Exhibit 10.88 of Select Medical Holdings Corporation’s Form S-1/A filed September 9, 2009 (Reg.
No. 333-152514).
10.33 Select Medical Holdings Corporation 2011 Equity Incentive Plan, incorporated by reference to Exhibit A to Select
Medical Holdings Corporation’s Definitive Proxy Statement on Schedule 14A filed on March 25, 2011 (Reg.
No. 333-174393).
10.34 Select Medical Holdings Corporation 2005 Equity Incentive Plan for Non-Employee Directors, as amended and
restated, incorporated by reference to Exhibit 10.89 of Select Medical Holdings Corporation’s Form S-1/A filed
September 9, 2009 (Reg. No. 333-152514).
10.35 Amendment No. 6 to Employment Agreement between Select Medical Corporation and Rocco A. Ortenzio,
incorporated by reference to Exhibit 10.95 of Select Medical Holdings Corporation’s Form S-1/A filed June 18,
2009 (Reg. No. 333-152514).
10.36 Amendment No. 6 to Employment Agreement between Select Medical Corporation and Robert A. Ortenzio,
incorporated by reference to Exhibit 10.96 of Select Medical Holdings Corporation’s Form S-1/A filed June 18,
2009 (Reg. No. 333-152514).
10.37 Third Amendment to Change of Control Agreement between Select Medical Corporation and Michael E. Tarvin,
incorporated by reference to Exhibit 10.100 of Select Medical Holdings Corporation’s Form S-1/A filed June 18,
2009 (Reg. No. 333-152514).
10.38 Third Amendment to Change of Control Agreement between Select Medical Corporation and Scott A. Romberger,
incorporated by reference to Exhibit 10.102 of Select Medical Holdings Corporation’s Form S-1/A filed June 18,
2009 (Reg. No. 333-152514).
10.39 Third Amendment to Change of Control Agreement between Select Medical Corporation and Martin F. Jackson,
incorporated by reference to Exhibit 10.103 of Select Medical Holdings Corporation’s Form S-1/A filed June 18,
2009 (Reg. No. 333-152514).
10.40 Form of Restricted Stock Agreement under the 2005 Equity Incentive Plan, incorporated by reference to
Exhibit 10.119 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical
Corporation filed on March 17, 2010 (Reg. Nos. 001-34465 and 001-31441).
10.41 Employment Agreement, dated September 13, 2010, by and between Select Medical Corporation and David S.
Chernow, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on September 15, 2010. (Reg. Nos. 001-34465 and
001-31441).
10.42 Amendment No. 1 to Employment Agreement, dated March 21, 2011, between Select Medical Corporation and
David S. Chernow, incorporated herein by reference to Exhibit 10.8 of the Quarterly Report on Form 10-Q of Select
Medical Holdings Corporation and Select Medical Corporation filed on May 5, 2011. (Reg. Nos. 001-34465 and
001-31441).
10.43 Amendment No. 7 to Employment Agreement, dated November 10, 2010, by and between Select Medical
Corporation and Rocco A. Ortenzio, incorporated herein by reference to Exhibit 10.1 of the Current Report on
Form 8-K of Select Medical Holdings Corporation and Select filed on November 15, 2010. (Reg. Nos. 001-34465
and 001-31441).
83
Number
Description
10.44 Amendment No. 7 to Employment Agreement, dated November 10, 2010, by and between Select Medical
Corporation and Robert A. Ortenzio, incorporated herein by reference to Exhibit 10.2 of the Current Report on
Form 8-K of Select Medical Holdings Corporation and Select filed on November 15, 2010. (Reg. Nos. 001-34465
and 001-31441).
10.45 Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical Corporation
and Martin F. Jackson, incorporated herein by reference to Exhibit 10.111 of the Annual Report on Form 10-K of
Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465
and 001-31441).
10.46 Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical Corporation and Robert
A. Ortenzio, incorporated herein by reference to Exhibit 10.112 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441).
10.47 Amendment No. 8 to Employment Agreement, dated March 8, 2011, between Select Medical Corporation and Rocco
A. Ortenzio, incorporated herein by reference to Exhibit 10.113 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465 and 001-31441).
10.48 Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical Corporation
and Scott A. Romberger, incorporated herein by reference to Exhibit 10.115 of the Annual Report on Form 10-K of
Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465
and 001-31441).
10.49 Fourth Amendment to Change of Control Agreement, dated March 8, 2011, between Select Medical Corporation
and Michael E. Tarvin, incorporated herein by reference to Exhibit 10.117 of the Annual Report on Form 10-K of
Select Medical Holdings Corporation and Select Medical Corporation filed on March 9, 2011 (Reg. Nos. 001-34465
and 001-31441).
10.50 Form of Restricted Stock Award Agreement under the Select Medical Holdings Corporation 2011 Equity Incentive
Plan, incorporated herein by reference to Exhibit 10.107 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on March 2, 2012 (Reg. Nos. 001-34465 and 001-31441).
10.51 Office Lease Agreement, dated October 30, 2014, between Century Park Investments, L.P. and Select Medical
Corporation, incorporated herein by reference to Exhibit 10.80 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on February 25, 2015 (Reg. Nos. 001-34465 and
001-31441).
10.52 First Lien Credit Agreement, dated June 1, 2015, by and among, Concentra Holdings, Inc., Concentra, Inc., JPMorgan
Chase Bank, N.A. as administrative agent, collateral agent and lender and the additional lenders names therein,
incorporated herein by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q of Select Medical Holdings
Corporation and Select Medical Corporation filed on August 6, 2015 (Reg. Nos. 001-34465 and 001-31441).
10.53 First Amendment to Lease Agreement, dated February 24, 2016, between Old Gettysburg II, LP and Select Medical
Corporation, incorporated herein by reference to Exhibit 10.82 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed February 26, 2016 (Reg. Nos. 001-34465 and
001-31441).
10.54 Second Amendment to the Lease Agreement, dated June 1, 2016, between Old Gettysburg II, LP and Select Medical
Corporation, incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Select Medical
Holdings Corporation and Select Medical Corporation filed August 4, 2016 (Reg. Nos. 001-34465 and 001-31441).
10.55 Third Amendment to the Lease Agreement, dated September 19, 2016, between Old Gettysburg II, LP and Select
Medical Corporation, incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of
Select Medical Holdings Corporation and Select Medical Corporation filed November 3, 2016 (Reg. Nos. 001-34465
and 001-31441).
10.56 Amendment No. 1, dated September 26, 2016, among Concentra Inc., Concentra Holdings, Inc., JP Morgan Chase
Bank, N.A, as the administrative agent, collateral agent and lender, and the additional lenders named therein,
incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings
Corporation and Select Medical Corporation filed on September 28, 2016 (Reg. Nos. 001-34465 and 001-31441).
10.57 Office Lease Agreement, dated October 28, 2016, between Select Medical Corporation and Old Gettysburg
Associates V, L.P., incorporated herein by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q of Select
Medical Holdings Corporation and Select Medical Corporation filed November 3, 2016 (Reg. Nos. 001-34465 and
001-31441).
10.58 First Amendment to the Lease Agreement, dated November 15, 2016, between Old Gettysburg Associates and Select
Medical Corporation, incorporated herein by reference to Exhibit 10.75 of the Annual Report on Form 10-K of Select
Medical Holdings Corporation and Select Medical Corporation filed February 23, 2017 (Reg. Nos. 001-34465 and
001-31441).
84
Number
Description
10.59 Select Medical Holdings Corporation 2016 Equity Incentive Plan, incorporated herein by reference to Appendix A
of the Definitive Proxy Statement on Schedule 14A of Select Medical Holdings Corporation filed March 3, 2016
(Reg. No. 001-34465).
10.60 Form of Restricted Stock Award Agreement under the Select Medical Holdings Corporation 2016 Equity Incentive
Plan, incorporated herein by reference to Exhibit 10.77 of the Annual Report on Form 10-K of Select Medical
Holdings Corporation and Select Medical Corporation filed February 23, 2017 (Reg Nos. 001-34465 and 001-31441).
10.61 Credit Agreement, dated as of March 6, 2017, among Select Medical Holdings Corporation, Select Medical
Corporation, JPMorgan Chase Bank, N.A., as Administrative and Collateral Agent, Wells Fargo Securities, LLC and
Deutsche Bank Securities Inc., as CoSyndication Agents and RBC Capital Markets, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Goldman Sachs Bank USA, PNC Bank, National Association and Morgan Stanley Senior
Funding, Inc., as Co-Documentation Agents and the other lenders and issuing banks party thereto, incorporated
herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and
Select Medical Corporation filed on March 7, 2017 (Reg Nos. 001- 34465 and 001-31441).
10.62 Change of Control Agreement, dated February 16, 2017, between Select Medical Corporation and John A. Saich,
incorporated herein by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q of Select Medical Holdings
Corporation and Select Medical Corporation filed May 4, 2017 (Reg Nos. 001- 34465 and 001-31441).
10.63 Second Amendment to Lease Agreement, dated as of May 30, 2017, between Old Gettysburg Associates and Select
Medical Corporation, incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Select
Medical Holdings Corporation and Select Medical Corporation filed August 3, 2017 (Reg. Nos. 001-34465 and
001-31441).
10.64 Amended and Restated Limited Liability Company Agreement of Concentra Group Holdings Parent, LLC, dated
February 1, 2018, by and among Concentra Group Holdings Parent, LLC, Select Medical Corporation, Welsh, Carson,
Anderson & Stowe XII, L.P., Dignity Health Holding Corporation, Cressey & Company IV LP, and the other members
named therein, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical
Holdings Corporation and Select Medical Corporation filed February 2, 2018 (Reg. Nos. 001-34465 and 001-31441).
10.65 Amendment No. 3, dated February 1, 2018, to the First Lien Credit Agreement, dated as of June 1, 2015, among
Concentra Inc., MJ Acquisition Corporation, Concentra Holdings, Inc., the Lenders party thereto and JPMorgan
Chase Bank, N.A., as amended by Amendment No. 1, dated as of September 26, 2016, Amendment No. 2, dated as
of March 20, 2017, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select
Medical Holdings Corporation and Select Medical Corporation filed February 2, 2018 (Reg. Nos. 001-34465 and
001-31441).
10.66 Second Lien Credit Agreement, dated February 1, 2018, by and among Concentra Inc., Concentra Holdings, Inc.,
the Lenders party thereto and Wells Fargo Bank, National Association, incorporated herein by reference to Exhibit
10.3 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation
filed February 2, 2018 (Reg. Nos. 001-34465 and 001-31441).
10.67 Amendment No. 1, dated March 22, 2018, to the Credit Agreement, dated March 6, 2017, by and among Select
Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent
and Collateral Agent, and the other lenders and issuing banks party thereto, incorporated herein by reference to
Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical
Corporation filed March 23, 2018 (Reg. Nos. 001-34465 and 001-31441).
10.68 Amendment No. 1, dated June 28, 2018, to the Amended and Restated Limited Liability Company Agreement of
Concentra Group Holdings Parent, LLC, dated February 1, 2018, by and among Concentra Group Holdings Parent,
LLC, Select Medical Corporation, Welsh, Carson, Anderson & Stowe XII, L.P., Dignity Health Holding Corporation,
Cressey & Company IV LP, and the other members named therein.
10.69 Amendment No. 2, dated October 26, 2018, to the Credit Agreement, dated March 6, 2017, by and among Select
Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent
and Collateral Agent, and the other lenders and issuing banks party thereto, as amended by Amendment No. 1, dated
as of March 22, 2018, incorporated herein by reference to Exhibit 10.1 of Current Report on Form 8-K of Select
Medical Holdings Corporation and Select Medical Corporation filed October 31, 2018 (Reg. Nos. 001-34465 and
001-31441).
10.70 Amendment No. 4, dated October 26, 2018, to the First Lien Credit Agreement, dated as of June 1, 2015, among
Concentra Holdings Inc., MJ Acquisition Corporation, Concentra Inc., the lenders party thereto and JPMorgan Chase
Bank, N.A., as Administrative and Collateral Agent, as amended by Amendment No. 1, dated as of September 26,
2016, Amendment No. 2, dated as of March 20, 2017 and Amendment No. 3, dated February 1, 2018, incorporated
herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select Medical Holdings Corporation and
Select Medical Corporation filed October 31, 2018 (Reg. Nos. 001-34465 and 001-31441).
10.71 Office Lease Agreement, dated as of October 24, 2018, between 207 Associates and Independence Avenue
Investments, LLC and Select Medical Corporation.
85
Number
Description
21.1 Subsidiaries of Select Medical Holdings Corporation.
23 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL
tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
The representations, warranties, and covenants contained in the agreements set forth in this Exhibit Index were made only
as of specified dates for the purposes of the applicable agreement, were made solely for the benefit of the parties to such agreement,
and may be subject to qualifications and limitations agreed upon by the parties. In particular, the representations, warranties, and
covenants contained in such agreement were negotiated with the principal purpose of allocating risk between the parties, rather
than establishing matters as facts, and may have been qualified by confidential disclosures. Such representations, warranties, and
covenants may also be subject to a contractual standard of materiality different from those generally applicable to stockholders
and to reports and documents filed with the SEC. Accordingly, investors should not rely on such representations, warranties, and
covenants as characterizations of the actual state of facts or circumstances described therein. Information concerning the subject
matter of such representations, warranties, and covenants may change after the date of such agreement, which subsequent
information may or may not be fully reflected in the parties’ public disclosures.
Item 16. Form 10-K Summary.
None.
86
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
/s/ MICHAEL E. TARVIN
Michael E. Tarvin
(Executive Vice President, General Counsel and
Secretary)
Date: February 21, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated as of February 21, 2019.
/s/ ROCCO A. ORTENZIO
Rocco A. Ortenzio
Director, Vice Chairman and Co-Founder
/s/ DAVID S. CHERNOW
David S. Chernow
President and Chief Executive Officer (principal executive
officer)
/s/ SCOTT A. ROMBERGER
Scott A. Romberger
Senior Vice President, Controller and Chief Accounting
Officer (principal accounting officer)
/s/ BRYAN C. CRESSEY
Bryan C. Cressey
Director
/s/ JAMES S. ELY III
James S. Ely III
Director
/s/ THOMAS A. SCULLY
Thomas A. Scully
Director
/s/ MARILYN B. TAVENNER
Marilyn B. Tavenner
Director
/s/ ROBERT A. ORTENZIO
Robert A. Ortenzio
Director, Executive Chairman and Co-Founder
/s/ MARTIN F. JACKSON
Martin F. Jackson
Executive Vice President and Chief Financial Officer
(principal financial officer)
/s/ RUSSELL L. CARSON
Russell L. Carson
Director
/s/ WILLIAM H. FRIST, M.D.
William H. Frist, M.D.
Director
/s/ LEOPOLD SWERGOLD
Leopold Swergold
Director
/s/ HAROLD L. PAZ
Harold L. Paz
Director
87
(This page has been left blank intentionally.)
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statement of Changes in Equity and Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statements Schedule II—Valuation and Qualifying Accounts
F-2
F-6
F-7
F-9
F-11
F-13
F-57
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Select Medical Holdings Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Select Medical Holdings Corporation and its subsidiaries (the
“Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive income, of
changes in equity and income, and of cash flows for each of the three years in the period ended December 31, 2018, including the
related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018
appearing under Item 15(a) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue
from contracts with customers as of January 1, 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions
on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded U.S. HealthWorks
from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in
a purchase business combination during 2018. We have also excluded U.S. HealthWorks from our audit of internal control over financial
reporting. U.S. HealthWorks is a joint-venture subsidiary whose total assets and total revenues excluded from management’s assessment
and our audit of internal control over financial reporting represent approximately 3% and 10%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2018.
F-2
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
February 21, 2019
We have served as the Company’s auditor since 2005.
F-3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of Select Medical Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Select Medical Corporation and its subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive income, of changes in
equity and income, and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes
and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 appearing under
Item 15(a) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control
over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue
from contracts with customers as of January 1, 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions
on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded U.S. HealthWorks
from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in
a purchase business combination during 2018. We have also excluded U.S. HealthWorks from our audit of internal control over financial
reporting. U.S. HealthWorks is a joint-venture subsidiary whose total assets and total revenues excluded from management’s assessment
and our audit of internal control over financial reporting represent approximately 3% and 10%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2018.
F-4
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
February 21, 2019
We have served as the Company’s auditor since 1999, which includes periods before the Company became subject to SEC reporting
requirements.
F-5
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable
Prepaid income taxes
Other current assets
Total Current Assets
Property and equipment, net
Goodwill
Identifiable intangible assets, net
Other assets
Total Assets
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts
Current portion of long-term debt and notes payable
Accounts payable
Accrued payroll
Accrued vacation
Accrued interest
Accrued other
Income taxes payable
Total Current Liabilities
Long-term debt, net of current portion
Non-current deferred tax liability
Other non-current liabilities
Total Liabilities
Commitments and contingencies (Note 17)
Redeemable non-controlling interests
Stockholders’ Equity:
Select Medical Holdings Corporation
Select Medical Corporation
December 31,
2017
December 31,
2018
December 31,
2017
December 31,
2018
$
122,549
$
175,178
$
122,549
$
691,732
31,387
75,158
920,826
912,591
2,782,812
326,519
184,418
706,676
20,539
90,131
992,524
979,810
3,320,726
437,693
233,512
691,732
31,387
75,158
920,826
912,591
2,782,812
326,519
184,418
175,178
706,676
20,539
90,131
992,524
979,810
3,320,726
437,693
233,512
$
$
5,127,166
$
5,964,265
$
5,127,166
$
5,964,265
29,463
$
25,083
$
29,463
$
22,187
128,194
160,562
92,875
19,885
143,166
9,071
605,403
2,677,715
124,917
145,709
3,553,744
43,865
146,693
172,386
110,660
12,137
190,691
3,671
705,186
3,249,516
153,895
158,940
4,267,537
22,187
128,194
160,562
92,875
19,885
143,166
9,071
605,403
2,677,715
124,917
145,709
3,553,744
25,083
43,865
146,693
172,386
110,660
12,137
190,691
3,671
705,186
3,249,516
153,895
158,940
4,267,537
640,818
780,488
640,818
780,488
Common stock of Holdings, $0.001 par value, 700,000,000
shares authorized, 134,114,715 and 135,265,864 shares issued
and outstanding at 2017 and 2018, respectively
Common stock of Select, $0.01 par value, 100 shares issued and
outstanding
Capital in excess of par
Retained earnings (accumulated deficit)
Total Select Medical Holdings Corporation and Select Medical
Corporation Stockholders’ Equity
Non-controlling interests
Total Equity
Total Liabilities and Equity
134
—
463,499
359,735
823,368
109,236
932,604
135
—
482,556
320,351
803,042
113,198
916,240
—
0
947,370
(124,002)
823,368
109,236
932,604
—
0
970,156
(167,114)
803,042
113,198
916,240
$
5,127,166
$
5,964,265
$
5,127,166
$
5,964,265
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Select Medical Holdings Corporation
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share amounts)
Net operating revenues
Costs and expenses:
Cost of services, exclusive of depreciation and amortization
General and administrative
Depreciation and amortization
Total costs and expenses
Income from operations
Other income and expense:
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating gain (loss)
Interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to non-controlling interests
Net income attributable to Select Medical Holdings Corporation
Earnings per common share (Note 16):
Basic
Diluted
$
$
$
For the Year Ended December 31,
2016
2017
2018
$
4,217,460
$
4,365,245
$
5,081,258
3,665,375
106,927
145,311
3,917,613
299,847
(11,626)
19,943
42,651
(170,081)
180,734
55,464
125,270
9,859
115,411
0.88
0.87
$
$
$
3,735,309
114,047
160,011
4,009,367
355,878
(19,719)
21,054
(49)
(154,703)
202,461
(18,184)
220,645
43,461
177,184
1.33
1.33
$
$
$
4,341,056
121,268
201,655
4,663,979
417,279
(14,155)
21,905
9,016
(198,493)
235,552
58,610
176,942
39,102
137,840
1.02
1.02
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Select Medical Corporation
Consolidated Statements of Operations and Comprehensive Income
(in thousands)
Net operating revenues
Costs and expenses:
Cost of services, exclusive of depreciation and amortization
General and administrative
Depreciation and amortization
Total costs and expenses
Income from operations
Other income and expense:
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating gain (loss)
Interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Less: Net income attributable to non-controlling interests
For the Year Ended December 31,
2016
2017
2018
$
4,217,460
$
4,365,245
$
5,081,258
3,665,375
106,927
145,311
3,917,613
299,847
(11,626)
19,943
42,651
(170,081)
180,734
55,464
125,270
9,859
3,735,309
114,047
160,011
4,009,367
355,878
(19,719)
21,054
(49)
(154,703)
202,461
(18,184)
220,645
43,461
4,341,056
121,268
201,655
4,663,979
417,279
(14,155)
21,905
9,016
(198,493)
235,552
58,610
176,942
39,102
137,840
Net income attributable to Select Medical Corporation
$
115,411
$
177,184
$
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Select Medical Holdings Corporation
Consolidated Statements of Changes in Equity and Income
(in thousands)
Select Medical Holdings Corporation Stockholders
Redeemable
Non-
controlling
interests
Common
Stock
Issued
Common
Stock
Par Value
Capital in
Excess
of Par
Retained
Earnings
Total
Stockholders’
Equity
Non-
controlling
Interests
Total
Equity
Balance at December 31, 2015
$
238,221
131,283
$
131
$
424,506
$
434,616
$
859,253
$
49,264
$
908,517
Net income attributable to Select Medical
Holdings Corporation
Net income (loss) attributable to non-
controlling interests
Issuance of restricted stock
Forfeitures of unvested restricted stock
Vesting of restricted stock
Repurchase of common shares
Stock option expense
Exercise of stock options
Issuance of non-controlling interests
Acquired non-controlling interests
Distributions to and purchases of non-
controlling interests
Redemption adjustment on non-controlling
interests
Other
115,411
115,411
115,411
1,426
(82)
(232)
202
1
0
0
0
(1)
0
16,640
(1,333)
4
1,672
2,377
(1,596)
—
—
—
16,640
(2,929)
4
1,672
2,377
—
(2,620)
(2,620)
—
—
16,640
(2,929)
4
1,672
50,178
2,514
47,801
2,514
75
579
654
(7,324)
(6,670)
(177,216)
(177,216)
(177,216)
(32)
(109)
(141)
541
400
12,479
(5,984)
177,216
227
Balance at December 31, 2016
$
422,159
132,597
$
132
$
443,908
$
371,685
$
815,725
$
90,176
$
905,901
Net income attributable to Select Medical
Holdings Corporation
Net income attributable to non-controlling
interests
Issuance of restricted stock
Forfeitures of unvested restricted stock
Vesting of restricted stock
Repurchase of common shares
Exercise of stock options
Issuance of non-controlling interests
Distributions to and purchases of non-
controlling interests
Redemption adjustment on non-controlling
interests
Other
35,639
(5,334)
187,506
848
177,184
177,184
177,184
1,598
(27)
(280)
227
2
0
0
0
(2)
0
18,291
(2,666)
2,017
1,951
(2,087)
—
—
—
18,291
(4,753)
2,017
1,951
7,822
7,822
—
—
18,291
(4,753)
2,017
18,280
16,329
7
7
(5,293)
(5,286)
(187,506)
(187,506)
(187,506)
452
452
202
654
Balance at December 31, 2017
$
640,818
134,115
$
134
$
463,499
$
359,735
$
823,368
$
109,236
$
932,604
Net income attributable to Select Medical
Holdings Corporation
Net income attributable to non-controlling
interests
Issuance of restricted stock
Forfeitures of unvested restricted stock
Vesting of restricted stock
Repurchase of common shares
Exercise of stock options
Issuance and exchange of non-controlling
interests
Distributions to and purchases of non-
controlling interests
Redemption adjustment on non-controlling
interests
Other
27,775
163,659
(217,570)
164,476
1,330
137,840
137,840
137,840
1,491
(168)
(357)
185
1
0
0
0
(1)
0
20,443
(3,728)
1,722
(3,109)
—
—
—
20,443
(6,837)
1,722
11,327
11,327
—
—
20,443
(6,837)
1,722
1,553
74,341
75,894
1,921
77,815
(932)
(83,617)
(84,549)
(10,839)
(95,388)
(164,476)
(164,476)
(164,476)
(363)
(363)
1,553
1,190
Balance at December 31, 2018
$
780,488
135,266
$
135
$
482,556
$
320,351
$
803,042
$
113,198
$
916,240
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Select Medical Corporation
Consolidated Statements of Changes in Equity and Income
(in thousands)
Select Medical Corporation Stockholders
Balance at December 31, 2015
$
238,221
0
$
0
$ 904,375
$
(45,122)
$
859,253
$
49,264
$
908,517
Redeemable
Non-
controlling
interests
Common
Stock
Issued
Common
Stock
Par Value
Capital in
Excess
of Par
Retained
Earnings
Total
Stockholders’
Equity
Non-
controlling
Interests
Total
Equity
Net income attributable to Select Medical
Corporation
Net income (loss) attributable to non-
controlling interests
Additional investment by Holdings
Dividends declared and paid to Holdings
Contribution related to restricted stock
award and stock option issuances by
Holdings
Issuance of non-controlling interests
Acquired non-controlling interests
Distributions to and purchases of non-
controlling interests
Redemption adjustment on non-controlling
interests
Other
12,479
(5,984)
177,216
227
115,411
115,411
(2,929)
1,672
16,644
2,377
75
579
—
1,672
(2,929)
16,644
2,377
—
654
115,411
(2,620)
1,672
(2,929)
16,644
50,178
2,514
(2,620)
47,801
2,514
(7,324)
(6,670)
(177,216)
(177,216)
(177,216)
(32)
(109)
(141)
541
400
Balance at December 31, 2016
$
422,159
0
$
0
$ 925,111
$ (109,386)
$
815,725
$
90,176
$
905,901
Net income attributable to Select Medical
Corporation
Net income attributable to non-controlling
interests
Additional investment by Holdings
Dividends declared and paid to Holdings
Contribution related to restricted stock
award issuances by Holdings
Issuance of non-controlling interests
Distributions to and purchases of non-
controlling interests
Redemption adjustment on non-controlling
interests
Other
35,639
(5,334)
187,506
848
177,184
177,184
177,184
(4,753)
2,017
18,291
1,951
—
2,017
(4,753)
18,291
1,951
7,822
16,329
7,822
2,017
(4,753)
18,291
18,280
7
7
(5,293)
(5,286)
(187,506)
(187,506)
(187,506)
452
452
202
654
Balance at December 31, 2017
$
640,818
0
$
0
$ 947,370
$ (124,002)
$
823,368
$
109,236
$
932,604
Net income attributable to Select Medical
Corporation
Net income attributable to non-controlling
interests
Additional investment by Holdings
Dividends declared and paid to Holdings
Contribution related to restricted stock
award issuances by Holdings
Issuance and exchange of non-controlling
interests
Distributions to and purchases of non-
controlling interests
Redemption adjustment on non-controlling
interests
Other
27,775
163,659
(217,570)
164,476
1,330
137,840
137,840
1,722
20,443
(6,837)
—
1,722
(6,837)
20,443
11,327
137,840
11,327
1,722
(6,837)
20,443
1,553
74,341
75,894
1,921
77,815
(932)
(83,617)
(84,549)
(10,839)
(95,388)
(164,476)
(164,476)
(164,476)
(363)
(363)
1,553
1,190
Balance at December 31, 2018
$
780,488
0
$
0
$ 970,156
$ (167,114)
$
803,042
$
113,198
$
916,240
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Select Medical Holdings Corporation
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries
Depreciation and amortization
Provision for bad debts
Equity in earnings of unconsolidated subsidiaries
Loss on extinguishment of debt
Gain on sale of assets and businesses
Gain on sale of equity investment
Impairment of equity investment
Stock compensation expense
Amortization of debt discount, premium and issuance costs
Deferred income taxes
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable
Other current assets
Other assets
Accounts payable
Accrued expenses
Net cash provided by operating activities
Investing activities
Business combinations, net of cash acquired
Purchases of property and equipment
Investment in businesses
Proceeds from sale of assets and businesses
Proceeds from sale of equity investment
Net cash used in investing activities
Financing activities
Borrowings on revolving facilities
Payments on revolving facilities
Proceeds from term loans
Payments on term loans
Revolving facility debt issuance costs
Borrowings of other debt
Principal payments on other debt
Repurchase of common stock
Proceeds from exercise of stock options
Increase (decrease) in overdrafts
Proceeds from issuance of non-controlling interests
Distributions to and purchases of non-controlling interests
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental information:
Cash paid for interest
Cash paid for taxes
Non-cash investing and financing activities:
Liabilities for purchases of property and equipment
Non-cash equity exchange for acquisition of U.S. HealthWorks
For the Year Ended December 31,
2016
2017
2018
$
125,270
$
220,645
$
176,942
20,476
145,311
532
(19,943)
11,626
(46,488)
(2,779)
5,339
17,413
15,656
(12,591)
29,241
17,450
9,290
(15,492)
46,292
346,603
(472,206)
(161,633)
(4,723)
80,463
3,779
(554,320)
575,000
(655,000)
795,344
(438,034)
—
27,721
(21,401)
(2,929)
1,672
10,746
11,846
(12,654)
292,311
84,594
14,435
99,029
142,640
70,756
32,861
—
$
$
$
20,006
160,011
1,133
(21,054)
6,527
(10,349)
—
—
19,284
11,130
(72,324)
(118,833)
1,597
(886)
3,903
17,341
238,131
(27,390)
(233,243)
(12,682)
80,350
—
(192,965)
970,000
(960,000)
1,139,487
(1,179,442)
(4,392)
46,621
(20,647)
(4,753)
2,017
(9,899)
9,982
(10,620)
(21,646)
23,520
99,029
122,549
149,156
64,991
30,043
—
$
$
$
15,721
201,655
(103)
(21,905)
2,999
(9,168)
—
—
23,326
13,112
7,217
54,575
(4,152)
7,857
(1,778)
27,896
494,194
(523,134)
(167,281)
(13,482)
6,760
—
(697,137)
595,000
(805,000)
779,823
(11,500)
(1,639)
42,218
(25,242)
(6,837)
1,722
(4,380)
2,926
(311,519)
255,572
52,629
122,549
175,178
193,406
48,153
29,134
238,000
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-11
Select Medical Corporation
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries
Depreciation and amortization
Provision for bad debts
Equity in earnings of unconsolidated subsidiaries
Loss on extinguishment of debt
Gain on sale of assets and businesses
Gain on sale of equity investment
Impairment of equity investment
Stock compensation expense
Amortization of debt discount, premium and issuance costs
Deferred income taxes
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable
Other current assets
Other assets
Accounts payable
Accrued expenses
Net cash provided by operating activities
Investing activities
Business combinations, net of cash acquired
Purchases of property and equipment
Investment in businesses
Proceeds from sale of assets and businesses
Proceeds from sale of equity investment
Net cash used in investing activities
Financing activities
Borrowings on revolving facilities
Payments on revolving facilities
Proceeds from term loans
Payments on term loans
Revolving facility debt issuance costs
Borrowings of other debt
Principal payments on other debt
Dividends paid to Holdings
Equity investment by Holdings
Increase (decrease) in overdrafts
Proceeds from issuance of non-controlling interests
Distributions to and purchases of non-controlling interests
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental information:
Cash paid for interest
Cash paid for taxes
Non-cash investing and financing activities:
Liabilities for purchases of property and equipment
Non-cash equity exchange for acquisition of U.S. HealthWorks
For the Year Ended December 31,
2016
2017
2018
$
125,270
$
220,645
$
176,942
20,476
145,311
532
(19,943)
11,626
(46,488)
(2,779)
5,339
17,413
15,656
(12,591)
29,241
17,450
9,290
(15,492)
46,292
346,603
(472,206)
(161,633)
(4,723)
80,463
3,779
(554,320)
575,000
(655,000)
795,344
(438,034)
—
27,721
(21,401)
(2,929)
1,672
10,746
11,846
(12,654)
292,311
84,594
14,435
99,029
142,640
70,756
32,861
—
$
$
$
20,006
160,011
1,133
(21,054)
6,527
(10,349)
—
—
19,284
11,130
(72,324)
(118,833)
1,597
(886)
3,903
17,341
238,131
(27,390)
(233,243)
(12,682)
80,350
—
(192,965)
970,000
(960,000)
1,139,487
(1,179,442)
(4,392)
46,621
(20,647)
(4,753)
2,017
(9,899)
9,982
(10,620)
(21,646)
23,520
99,029
122,549
149,156
64,991
30,043
—
$
$
$
15,721
201,655
(103)
(21,905)
2,999
(9,168)
—
—
23,326
13,112
7,217
54,575
(4,152)
7,857
(1,778)
27,896
494,194
(523,134)
(167,281)
(13,482)
6,760
—
(697,137)
595,000
(805,000)
779,823
(11,500)
(1,639)
42,218
(25,242)
(6,837)
1,722
(4,380)
2,926
(311,519)
255,572
52,629
122,549
175,178
193,406
48,153
29,134
238,000
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-12
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Business Description
Select Medical Corporation (“Select”) was formed in December 1996 and commenced operations during February 1997.
Select Medical Holdings Corporation (“Holdings”) was formed in October 2004 and on February 24, 2005, Select merged with a
subsidiary of Holdings, which resulted in Select becoming a wholly owned subsidiary of Holdings. On September 30, 2009,
Holdings completed its initial public offering of common stock. Holdings and Select and their subsidiaries are collectively referred
to as the “Company.” The consolidated financial statements of Holdings include the accounts of its wholly owned subsidiary Select.
Holdings conducts its business through Select and its subsidiaries.
The Company is, based on number of facilities, one of the largest operators of critical illness recovery hospitals (previously
referred to as long term acute care hospitals), rehabilitation hospitals (previously referred to as inpatient rehabilitation facilities),
outpatient rehabilitation clinics, and occupational health centers in the United States. As of December 31, 2018, the Company had
operations in 47 states and the District of Columbia. As of December 31, 2018, the Company operated 96 critical illness recovery
hospitals, 26 rehabilitation hospitals, and 1,662 outpatient rehabilitation clinics. As of December 31, 2018, Concentra, a joint
venture subsidiary, operated 524 occupational health centers. Concentra also operated 124 onsite clinics at employer worksites
and 31 Department of Veterans Affairs CBOCs.
The Company is managed through four business segments: the critical illness recovery hospital segment (previously referred
to as the long term acute care segment), the rehabilitation hospital segment (previously referred to as the inpatient rehabilitation
segment), the outpatient rehabilitation segment, and the Concentra segment. The Company’s critical illness recovery hospital
segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical
needs, and the rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical
rehabilitation care. Patients are typically admitted to the Company’s critical illness recovery hospitals and rehabilitation hospitals
from general acute care hospitals. The Company’s outpatient rehabilitation segment consists of clinics that provide physical,
occupational, and speech rehabilitation services. The Company’s Concentra segment consists of occupational health centers and
contract services provided at employer worksites and Department of Veterans Affairs community-based outpatient clinics
(“CBOCs”) that deliver occupational medicine, physical therapy, veteran’s healthcare, and consumer health services.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, including disclosure of contingencies, at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to: amounts realizable
for services performed, estimated useful lives of assets, the valuation of intangible assets, amounts payable for self-insured losses,
and the computation of income taxes. Future events and their effects cannot be predicted with certainty; accordingly, the Company’s
accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the financial statements
will change as new events occur, as more experience is acquired, as additional information is obtained, and as the Company’s
operating environment changes. The Company’s management evaluates and updates assumptions and estimates on an ongoing
basis. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the subsidiaries, limited liability companies,
and limited partnerships in which the Company has a controlling financial interest. All intercompany balances and transactions
are eliminated in consolidation.
F-13
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Non-Controlling Interests
The ownership interests held by outside parties in subsidiaries, limited liability companies and limited partnerships controlled
by the Company are classified as non-controlling interests. Net income or loss is attributed to the Company’s non-controlling
interests in accordance with Accounting Standards Codification (“ASC”) Topic 810, Consolidation. Some of the Company’s non-
controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company
to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and
have been adjusted to their approximate redemption values, after the attribution of net income or loss, in accordance with ASC
Topic 480, Distinguishing liabilities from equity.
The Company’s redeemable non-controlling interest is comprised primarily of the Class A interests owned by outside members
of Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”), each which have put rights with respect to their
interests in Concentra Group Holdings Parent. The redemption value of these interests is approximately $613.3 million and $750.6
million as of December 31, 2017 and 2018, respectively.
Earnings per Share
The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per
share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating
securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of
the Company’s two-class method is as follows:
(i) Net income attributable to the Company is reduced by the amount of dividends declared and the contractual amount of
dividends in the current period for each class of stock, if any.
(ii) The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested
restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each
security is determined by adding both distributed and undistributed net income for the period.
(i)
The net income allocated to each security is then divided by the weighted average number of outstanding shares for the
period to which the earnings are allocated to determine the EPS for each security considered in the two-class method.
Segment Reporting
The Company identifies its operating segments according to how the chief operating decision maker evaluates financial
performance and allocates resources. Prior to 2017, the Company’s reportable segments were specialty hospitals, outpatient
rehabilitation, and Concentra. During the year ended December 31, 2017, the Company changed its internal segment reporting
structure to reflect how the Company now manages its business operations, reviews operating performance, and allocates resources.
The Company’s reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the
outpatient rehabilitation segment, and the Concentra segment. Prior year results presented herein conform to the current reportable
segment structure.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash
equivalents. Cash equivalents are stated at cost which approximates fair value.
F-14
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Accounts Receivable
Substantially all of the Company’s accounts receivable are related to providing healthcare services to patients whose costs
are primarily paid by federal and state governmental authorities, managed care health plans, commercial insurance companies,
and workers’ compensation and employer programs. The Company reports accounts receivable at an amount equal to the
consideration the Company expects to receive in exchange for providing healthcare services to its patients, which is estimated
using contractual provisions associated with specific payors, historical reimbursement rates, and an analysis of past experience to
estimate potential adjustments. The Company writes-off amounts that have been deemed to be uncollectible because of
circumstances that affect the ability of payors to make payments as they occur.
Credit Risk and Payor Concentrations
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash balances
and trade receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit
to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements.
The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to the Company’s
critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, the Company
verifies insurance coverage prior to the patient’s visit. Within the Company’s Concentra centers, the Company verifies insurance
coverage or receives authorization from the patient’s employer prior to the patient’s visit.
Because of the geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare
represents the Company’s only significant concentration of credit risk. Approximately 27% and 16% of the Company’s accounts
receivable are from Medicare at December 31, 2017 and 2018, respectively. The Company’s primary collection risks relate to non-
governmental payors and deductibles, co-payments, and amounts owed by the patient. Deductibles, co-payments, and self-insured
amounts owed by the patient are an immaterial portion of the Company’s accounts receivable balance. Approximately 0.3% of the
Company’s accounts receivable were from deductibles, co-payments, and self-insured amounts owed by patients at both
December 31, 2017 and 2018.
A significant portion of the Company’s net operating revenues are generated directly from the Medicare program. Net
operating revenues generated directly from the Medicare program represented approximately 30%, 30%, and 27% of the Company’s
total net operating revenues for the years ended December 31, 2016, 2017, and 2018, respectively. As a provider of services under
the Medicare program, the Company is subject to extensive regulations. The inability of any of the Company’s critical illness
recovery hospitals, rehabilitation hospitals, or outpatient rehabilitation clinics to comply with Medicare regulations can result in
significant changes in the net operating revenues generated from the Medicare program.
Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and
indebtedness. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value
because of the short-term maturity of these instruments. The principal outstanding, carrying values, and fair values of the Company’s
indebtedness are presented in Note 9.
F-15
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Maintenance and repairs of property and equipment
are expensed as incurred. Improvements that increase the estimated useful life of an asset are capitalized. Direct internal and
external costs of developing software for internal use, including programming and enhancements, are capitalized and depreciated
over the estimated useful lives once the software is placed in service. Capitalized software costs are included within furniture and
equipment. Software training costs, maintenance, and repairs are expensed as incurred. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the assets or the term of the lease, as appropriate. The general
range of useful lives is as follows:
Land improvements
Leasehold improvements
Buildings
Building improvements
Furniture and equipment
2 – 25 years
1 – 15 years
40 years
5 – 30 years
1 – 20 years
The Company reviews the realizability of long-lived assets whenever events or circumstances occur which indicate recorded
costs may not be recoverable. If it is determined that a long-lived asset or asset group is not recoverable, an impairment charge is
recognized based on the excess of the carrying amount of the long-lived asset or asset group over its fair value.
Intangible Assets
Goodwill and indefinite-lived identifiable intangible assets
Goodwill and other indefinite-lived intangible assets are recognized primarily as the result of business combinations. Goodwill
is assigned to reporting units based upon the specific nature of the business acquired. When a business combination contains
business components related to more than one reporting unit, goodwill is assigned to each reporting unit based upon an allocation
determined by the relative fair values of the business acquired. When we dispose of a business, goodwill is allocated to the gain
or loss on disposition using the relative fair value methodology.
Goodwill and other indefinite-lived intangible assets are not amortized, but instead are subject to periodic impairment
evaluations. Impairment tests are required to be conducted at least annually or when events or conditions occur that might suggest
a possible impairment. These events or conditions include, but are not limited to: a significant adverse change in the business
environment, regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of
such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence
of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge.
The Company may first assess qualitatively if it can conclude whether goodwill is more likely than not impaired. If goodwill
is more likely than not impaired, the Company is then required to complete a quantitative analysis of whether a reporting unit’s
fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount, the Company considers relevant events or circumstances that affect the fair value or carrying amount
of a reporting unit. The Company considers both the income and market approach in determining the fair value of its reporting
units when performing a quantitative analysis.
At December 31, 2018, the Company’s other indefinite-lived intangible assets consist of certain trademarks, certificates of
need, and accreditations. To determine the fair value of the trademark, the Company uses a relief from royalty income approach.
For the Company’s certificates of need and accreditations, the Company performs qualitative assessments. As part of these
assessments, the Company evaluates the current business environment, regulatory environment, legal and other company-specific
factors. If it is more likely than not that the fair values are less than the carrying values, the Company performs a quantitative
impairment test.
F-16
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
The Company’s most recent impairment assessments were completed during the fourth quarter of 2018 utilizing information
as of October 1, 2018. The Company did not identify any instances of impairment with respect to goodwill or other indefinite-
lived intangible assets as of October 1, 2018.
Finite-lived identifiable intangible assets
At December 31, 2018, the Company’s finite-lived intangible assets consist of certain trademarks, customer relationships,
non-compete agreements, and leasehold interests. Finite-lived intangible assets are amortized based on the pattern in which the
economic benefits are consumed or otherwise depleted. If such a pattern cannot be reliably determined, finite-lived intangible
assets are amortized on a straight-line basis over their estimated lives. Management believes that the below estimated useful lives
are reasonable based on the economic factors applicable to each class of finite-lived intangible asset.
Customer relationships
Non-compete agreements
Leasehold interests
Trademarks
5 – 17 years
1 – 15 years
1 – 15 years
1 year
The Company reviews the realizability of finite-lived intangible assets whenever events or circumstances occur which indicate
recorded amounts may not be recoverable. If the expected undiscounted future cash flows are less than the carrying amount of
such assets, the Company recognizes an impairment loss to the extent the carrying amount of the assets exceeds their estimated
fair value.
Equity Method Investments
The Company applies the equity method of accounting for investments in which the Company has the ability to exercise
significant influence over the operating and financial policies of the investee, but does not possess a controlling financial interest
in the investee. Investments of this nature are recorded at original cost and adjusted periodically to recognize the Company’s
proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment accounted
for under the equity method exceed the carrying amount, the investment balance is reduced to zero. The Company resumes
accounting for the investment under the equity method if the investee subsequently reports net income and the Company’s share
of that net income exceeds the share of the net losses not recognized during the period the equity method was suspended. Investments
are written down only when there is clear evidence that a decline in value that is other than temporary has occurred. The Company
evaluates its equity method investments for impairment when there is evidence or indicators that a loss in value may be other than
temporary.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements. Deferred tax assets and liabilities are determined on the basis of the differences
between the book and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences
are expected to reverse. The Company also recognizes the future tax benefits from net operating loss carryforwards as deferred
tax assets. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes
the enactment date.
The Company evaluates the realizability of deferred tax assets and reduces those assets using a valuation allowance if it is
more likely than not that some portion or all of the deferred tax asset will not be realized. Among the factors used to assess the
likelihood of realization are projections of future taxable income streams, the expected timing of the reversals of existing temporary
differences, and the impact of tax planning strategies that could be implemented to avoid the potential loss of future tax benefits.
Reserves for uncertain tax positions are established for exposure items related to various federal and state tax matters. Income
tax reserves are recorded when an exposure is identified and when, in the opinion of management, it is more likely than not that
a tax position will not be sustained and the amount of the liability can be estimated.
F-17
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Insurance Risk Programs
Under a number of the Company’s insurance programs, which include the Company’s employee health insurance, workers’
compensation, and professional malpractice liability insurance programs, the Company is liable for a portion of its losses before
it can attempt to recover from the applicable insurance carrier. The Company accrues for losses under an occurrence-based approach
whereby the Company estimates the losses that will be incurred in a respective accounting period and accrues that estimated
liability using actuarial methods. These programs are monitored quarterly and estimates are revised as necessary to take into
account additional information. The Company also records insurance proceeds receivable for liabilities which exceed the
Company’s deductibles and self-insured retention limits and are recoverable through insurance policies.
Revenue Recognition
Patient Services Revenue
Patient services revenue is recognized when obligations under the terms of the contract are satisfied; generally, this occurs
as the Company provides healthcare services, as each service provided is distinct and future services rendered are not dependent
on previously rendered services. Patient service revenues are recognized at an amount equal to the consideration the Company
expects to receive in exchange for providing healthcare services to its patients. These amounts are due from patients; third-party
payors, including health insurers and government programs; and other payors.
Medicare: Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled
persons, and persons with end stage renal disease. Amounts we receive for treatment of patients covered by the Medicare program
are generally less than the standard billing rates; accordingly, the Company recognizes revenue based on amounts which are
reimbursable by Medicare under prospective payment systems and provisions of cost-reimbursement and other payment methods.
The amount reimbursed is derived based on the type of services provided.
Non-Medicare: The Company is reimbursed for healthcare services provided from various other payor sources which include
insurance companies, state Medicaid programs, workers’ compensation programs, health maintenance organizations, preferred
provider organizations, other managed care companies and employers, as well as patients. The Company is reimbursed by these
payors using a variety of payment methodologies and the amounts the Company receives are generally less than the standard
billing rates.
In the critical illness recovery hospital and rehabilitation hospital segments, the Company recognizes revenue based on
known contractual provisions associated with the specific payor or, where the Company has a relatively homogeneous patient
population, the Company will monitor individual payors’ historical reimbursement rates to derive a per diem rate which is used
to determine the amount of revenue to be recognized for services rendered. In the outpatient rehabilitation and Concentra segments,
the Company recognizes revenue from payors based on known contractual provisions, negotiated amounts, or usual and customary
amounts associated with the specific payor or based on the service provided. The Company performs provision testing, using
internally developed systems, whereby the Company monitors historical reimbursement rates and compares them against the
associated gross charges for the service provided. The percentage of historical reimbursed claims to gross charges is utilized to
determine the amount of revenue to be recognized for services rendered.
The Company is subject to potential retrospective adjustments to net operating revenues in future periods for administrative
matters and other price concessions. These adjustments, which are estimated based on an analysis of historical experience by payor
source, are accounted for as a constraint to the amount of revenue recognized by the Company in the period services are rendered.
Other Revenues
The Company recognizes revenue for services provided to healthcare institutions, principally for providing management and
employee leasing services, under contractual arrangements with related parties affiliated with the Company and with other non-
affiliated healthcare institutions. Revenue is recognized when the obligations under the terms of the contract are satisfied. Revenues
from these services are measured as the amount of consideration the Company expects to receive for those services.
F-18
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
Lease Accounting
Beginning in February 2016, the Financial Accounting Standards Board (the “FASB”) issued several Accounting Standards
Updates (“ASU”) which established Topic 842, Leases (“Topic 842”). Topic 842 includes a lessee accounting model that recognizes
two types of leases: finance and operating. This standard requires that a lessee recognize on the balance sheet right-of-use assets
and lease liabilities for all leases with lease terms of more than twelve months. For income statement purposes, the FASB retained
the dual model, requiring leases to be classified as either operating or finance. The recognition, measurement, and presentation of
expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease.
The standard provides a number of optional practical expedients in transition. The Company will elect the package of practical
expedients, which permits the Company not to reassess under Topic 842 the Company’s prior conclusions about lease identification,
lease classification, and initial direct costs. The Company will not elect the use-of-hindsight or the practical expedient pertaining
to land easements; the latter not being applicable to the Company. The Company will elect the short-term lease recognition
exemption for its equipment leases. Consequently, the Company will not recognize right-of-use assets or lease liabilities for these
leases which have terms of less than twelve months. The Company will also elect the practical expedient to not separate lease and
non-lease components for all of its leases.
The Company will implement the standard using a modified retrospective approach with a cumulative-effect adjustment as
of January 1, 2019. Prior comparative periods will not be adjusted under this approach. The adoption of the standard will have a
material impact on the Company’s consolidated balance sheets, as the Company will recognize right-of-use assets and lease
liabilities for its operating leases. The adoption of this standard will not have a material impact on the Company’s consolidated
statements of operations and comprehensive income. The Company will not recognize a cumulative-effect adjustment to retained
earnings upon adoption. The Company’s accounting for its finance leases, formerly referred to as capital leases, will remain
substantially unchanged.
The Company has validated the accuracy and completeness of its lease data and has implemented a new technology platform
to account for leases under Topic 842. The Company’s remaining implementation efforts are focused on testing the technology
platform and designing disclosure processes and related controls.
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on
Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of
occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires
entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected
credit losses. The Company’s accounts receivable derived from contracts with customers will be subject to ASU 2016-13.
The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. The guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to
retained earnings as of the beginning of the earliest comparative period in the financial statements. Given the very high rate of
collectability of the Company’s accounts receivable derived from contracts with customers, the impact of ASU 2016-13 is unlikely
to be material.
F-19
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Organization and Significant Accounting Policies (Continued)
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted Topic 606, Revenue from Contracts with Customers using the full retrospective
transition method. Adoption of the revenue recognition standard impacted the Company’s reported results as follows:
For the Year Ended December 31, 2016
For the Year Ended December 31, 2017
As Reported
As Adjusted(1)
Adoption
Impact
As Reported
As Adjusted(1)
Adoption
Impact
(in thousands)
Consolidated Statements of Operations
and Comprehensive Income
Net operating revenues
Bad debt expense
$
4,286,021
$
4,217,460
$
(68,561) $
4,443,603
$
4,365,245
$
69,093
532
(68,561)
79,491
1,133
(78,358)
(78,358)
____________________________________________________________
(1) Bad debt expense is now included in cost of services on the consolidated statements of operations and comprehensive income.
For the Year Ended December 31, 2016
For the Year Ended December 31, 2017
As Reported
As Adjusted
Adoption
Impact
As Reported
As Adjusted
Adoption
Impact
(in thousands)
Consolidated Statements of Cash Flows
Provision for bad debts
$
69,093
$
532
$
(68,561) $
79,491
$
1,133
$
Changes in accounts receivable
(39,320)
29,241
68,561
(197,191)
(118,833)
December 31, 2017
As Reported
As Adjusted
(in thousands)
(78,358)
78,358
Adoption
Impact
Consolidated Balance Sheets
Accounts receivable
Allowance for doubtful accounts
Accounts receivable
$
$
767,276
75,544
691,732
$
$
691,732
—
691,732
$
$
(75,544)
(75,544)
—
F-20
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Acquisitions
U.S. HealthWorks Acquisition
On February 1, 2018, Concentra acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S.
HealthWorks”), an occupational medicine and urgent care provider, pursuant to the terms of an Equity Purchase and Contribution
Agreement (the “Purchase Agreement”) dated as of October 22, 2017, by and among Concentra, U.S. HealthWorks, Concentra
Group Holdings, LLC (“Concentra Group Holdings”), Concentra Group Holdings Parent, and Dignity Health Holding Corporation
(“DHHC”). For the years ended December 31, 2017 and 2018, the Company recognized $2.8 million and $2.9 million of U.S.
HealthWorks acquisition costs, respectively, which are included in general and administrative expense.
In connection with the closing of the transaction, Concentra Group Holdings made distributions to its equity holders and
redeemed certain of its outstanding equity interests from existing minority equity holders. Subsequently, Concentra Group Holdings
and a wholly owned subsidiary of Concentra Group Holdings Parent merged, with Concentra Group Holdings surviving the merger
and becoming a wholly owned subsidiary of Concentra Group Holdings Parent. As a result of the merger, the equity interests of
Concentra Group Holdings outstanding after the redemption described above were exchanged for membership interests in Concentra
Group Holdings Parent.
Concentra acquired U.S. HealthWorks for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity
interest in Concentra Group Holdings Parent, which was valued at $238.0 million. The remainder of the purchase price was paid
in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.
For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair values in accordance with the provisions of ASC Topic 805, Business
Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.
The following table reconciles the fair values of identifiable net assets and goodwill to the consideration given for the acquired
business (in thousands):
Accounts receivable
Other current assets
Property and equipment
Identifiable intangible assets
Other assets
Goodwill
Total assets
Accounts payable and other current liabilities
Deferred income taxes and other long-term liabilities
Total liabilities
Consideration given
$
$
68,934
10,810
69,712
140,406
25,435
540,067
855,364
49,925
51,851
101,776
753,588
The fair values assigned to tangible assets were derived using a combination of the market and cost approaches. Significant
judgments used in valuing tangible assets include estimated reproduction or replacement cost, useful lives of assets, and estimated
selling prices. The fair values assigned to identifiable intangible assets were determined through the use of the income and cost
approaches. Both valuation methods rely on management judgment including expected future cash flows, customer attrition rates,
contributory effects of other assets utilized in the business, peer group cost of capital and royalty rates, and other factors. Useful
lives for identifiable intangible assets were determined based upon the remaining useful economic lives of the identifiable intangible
assets that are expected to contribute directly or indirectly to future cash flows.
F-21
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Acquisitions (Continued)
Customer relationships
Trademark
Favorable leasehold interests
Identifiable intangible assets
Fair Value
(in thousands)
Weighted Average
Amortization Period
(in years)
$
$
135,000
5,000
406
140,406
15 years
1 year
2.9 years
The customer relationships and trademarks are being amortized on a straight-line basis over their expected useful lives.
Favorable leasehold interests are being amortized over their remaining lease terms at the time of acquisition.
Goodwill of $540.1 million was recognized for the business combination, representing the excess of the consideration given
over the fair value of identifiable net assets acquired. The value of goodwill was derived from U.S. HealthWorks’ future earnings
potential and its assembled workforce. Goodwill was assigned to the Concentra reporting unit and is not deductible for tax purposes.
However, prior to its acquisition by the Company, U.S. HealthWorks completed certain acquisitions that resulted in tax deductible
goodwill with an estimated value of $83.1 million, which the Company will deduct through 2032.
U.S. HealthWorks contributed net operating revenues of $488.8 million for the year ended December 31, 2018, which is
reflected in the Company’s consolidated statements of operations and comprehensive income. Due to the integrated nature of the
Company’s operations, it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.
Physiotherapy Acquisition
On March 4, 2016, Select acquired all of the issued and outstanding equity securities of Physiotherapy Associates
Holdings, Inc. (“Physiotherapy”) for $406.3 million, net of $12.3 million of cash acquired. Physiotherapy is a national provider
of outpatient physical rehabilitation care offering a wide range of services, including general orthopedics, spinal care, and
neurological rehabilitation, as well as orthotics and prosthetics services. For the year ended December 31, 2016, $3.2 million of
Physiotherapy acquisition costs were recognized in general and administrative expense.
During the year ended December 31, 2016, the Company finalized the accounting for identifiable intangible assets, fixed
assets, non-controlling interests, and certain pre-acquisition contingencies. During the quarter ended March 31, 2017, the Company
completed the accounting for certain deferred tax matters.
The following table reconciles the fair values of identifiable net assets and goodwill to the consideration given for the acquired
business (in thousands):
Cash and cash equivalents
Identifiable tangible assets, excluding cash and cash equivalents
Identifiable intangible assets
Goodwill
Total assets
Total liabilities
Acquired non-controlling interests
Net assets acquired
Less: Cash and cash equivalents acquired
Net cash paid
$
$
12,340
87,832
32,484
343,187
475,843
54,685
2,514
418,644
(12,340)
406,304
Goodwill of $343.2 million was recognized in the business combination, representing the excess of the consideration given
over the fair value of identifiable net assets acquired. The value of goodwill was derived from Physiotherapy’s future earnings
potential and its assembled workforce. Goodwill was assigned to the outpatient rehabilitation reporting unit and is not deductible
for tax purposes. However, prior to its acquisition by the Company, Physiotherapy completed certain acquisitions that resulted in
tax deductible goodwill with an estimated value of $8.8 million, which the Company will deduct through 2030.
F-22
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2.
Acquisitions (Continued)
Due to the integration of Physiotherapy into the Company’s outpatient rehabilitation operations, it is not practicable to
separately identify net operating revenues and earnings of Physiotherapy on a stand-alone basis.
Pro Forma Results
The following pro forma unaudited results of operations have been prepared assuming the acquisitions of Physiotherapy and
U.S. HealthWorks occurred January 1, 2015 and 2017, respectively. These results are not necessarily indicative of the results of
future operations nor of the results that would have occurred had the acquisitions been consummated on the aforementioned dates.
Net operating revenues
Net income attributable to the Company
For the Year Ended December 31,
2016
2017
2018
(in thousands, except per share amounts)
$
4,339,551
$
4,903,612
$
5,128,838
113,590
170,689
140,488
The Company's pro forma results were adjusted to recognize Physiotherapy and U.S. Healthworks acquisition costs as of
January 1, 2015 and 2017, respectively. Accordingly, for the year ended December 31, 2016, pro forma results were adjusted to
exclude $3.2 million of Physiotherapy acquisition costs. For the year ended December 31, 2017, pro forma results were adjusted
to include approximately $2.9 million of U.S. HealthWorks acquisition costs. These acquisition costs were excluded from the pro
forma results for the year ended December 31, 2018.
3.
Variable Interest Entities
Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which
restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control
over medical decisions by physicians. In states which prohibit the corporate practice of medicine, Concentra typically enters into
long-term management agreements with professional corporations or associations that are owned by licensed physicians, which,
in turn, employ or contract with physicians who provide professional medical services in its occupational health centers.
The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-
medical operations of the occupational health centers and provide all management and administrative services. Concentra receives
a management fee for these services, which is based, in part, on the performance of the professional corporation or association.
Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed
physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional
corporation or association to a new licensed physician at any time.
Based on the provisions of these agreements, the Company has determined that it has the ability to direct the activities which
most significantly impact the performance of these professional corporations and associations and have an obligation to absorb
losses or receive benefits which could potentially be significant to the professional corporations and associations. Accordingly,
the professional corporations and associations are variable interest entities for which the Company is the primary beneficiary.
As of December 31, 2017 and 2018, the total assets of the Company's variable interest entities were $108.2 million and
$166.2 million, respectively, which is comprised principally of accounts receivable. As of December 31, 2017 and 2018, the total
liabilities of the Company's variable interest entities were $105.7 million and $164.4 million, respectively, which is comprised
principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned
management agreements.
F-23
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
Sale of Businesses
The Company recognized a non-operating gain of $35.6 million resulting from the sale of businesses during the year ended
December 31, 2016. The non-operating gain was the result of the sale of the Company’s contract therapy businesses for $65.0
million, resulting in a non-operating gain of $33.9 million, and the sale of nine outpatient rehabilitation clinics to an entity the
Company holds as an equity method investment, resulting in a non-operating gain of $1.7 million.
The Company recognized a non-operating gain of $8.6 million resulting from the sale of businesses during the year ended
December 31, 2018. The non-operating gain was comprised of $7.0 million resulting from the sale of 41 wholly owned outpatient
rehabilitation clinics to entities the Company holds as equity method investments and $1.6 million related to additional proceeds
received during 2018 from the sale of the Company’s contract therapy businesses, as described above.
5.
Property and Equipment
The Company’s property and equipment consists of the following:
Land
Leasehold improvements
Buildings
Furniture and equipment
Construction-in-progress
Total property and equipment
Accumulated depreciation
Property and equipment, net
December 31,
2017
2018
(in thousands)
$
77,077
$
420,632
414,704
517,912
112,930
1,543,255
(630,664)
$
912,591
$
87,358
498,520
481,375
609,805
67,333
1,744,391
(764,581)
979,810
Depreciation expense was $129.0 million, $142.6 million, and $171.7 million for the years ended December 31, 2016, 2017,
and 2018, respectively.
F-24
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.
Intangible Assets
Goodwill
The following table shows changes in the carrying amounts of goodwill by reporting unit for the years ended December 31,
2017 and 2018:
Critical Illness
Recovery
Hospital(1)
Rehabilitation
Hospital(1)
Specialty
Hospitals
Outpatient
Rehabilitation
Concentra
Total
(in thousands)
Balance as of January 1, 2017
$
— $
— $
1,447,406
$
643,557
$
660,037
$
2,751,000
Acquired
Measurement period adjustment
—
—
12,887
—
797
(342)
Reorganization of reporting units
1,045,220
402,641
(1,447,861)
3,797
168
—
14,505
—
—
31,986
(174)
—
Balance as of December 31, 2017
$
1,045,220
$
415,528
$
— $
647,522
$
674,542
$
2,782,812
Acquired
Measurement period adjustment
Sold
—
—
—
1,118
—
—
—
—
—
4,309
—
(9,409)
537,424
4,472
—
542,851
4,472
(9,409)
Balance as of December 31, 2018
$
1,045,220
$
416,646
$
— $
642,422
$
1,216,438
$
3,320,726
_______________________________________________________________________________
(1)
The critical illness recovery hospital reporting unit was previously referred to as the long term acute care reporting unit.
The rehabilitation hospital reporting unit was previously referred to as the inpatient rehabilitation reporting unit.
Identifiable Intangible Assets
The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the
Company’s identifiable intangible assets:
Gross
Carrying
Amount
2017
Accumulated
Amortization
December 31,
Net
Carrying
Amount
Gross
Carrying
Amount
(in thousands)
2018
Accumulated
Amortization
Net
Carrying
Amount
Indefinite-lived intangible assets:
Trademarks
Certificates of need
Accreditations
Finite-lived intangible assets:
Trademarks
Customer relationships
Favorable leasehold interests
Non-compete agreements
$
166,698
$
— $
166,698
$
166,698
$
— $
166,698
19,155
1,895
—
143,953
13,295
28,023
—
—
—
(38,281)
(4,319)
(3,900)
19,155
1,895
—
105,672
8,976
24,123
19,174
1,857
5,000
280,710
13,553
29,400
—
—
(4,583)
(61,900)
(6,064)
(6,152)
19,174
1,857
417
218,810
7,489
23,248
Total identifiable intangible assets
$
373,019
$
(46,500) $
326,519
$
516,392
$
(78,699) $
437,693
The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as
incurred. At December 31, 2018, the accreditations and trademarks have a weighted average time until next renewal of 1.5 years
and 8.2 years, respectively.
F-25
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.
Intangible Assets (Continued)
The Company’s finite-lived customer relationships, non-compete agreements, and trademarks amortize over their estimated
useful lives. Amortization expense was $16.3 million, $17.4 million, and $29.9 million for the years ended December 31, 2016,
2017, and 2018, respectively. The Company’s leasehold interests have finite lives and are amortized to rent expense over the
remaining term of their respective leases to reflect a market rent per period based upon the market conditions present at the
acquisition date.
Estimated amortization expense of the Company’s finite-lived customer relationships, non-compete agreements, and
trademarks for each of the five succeeding years is as follows:
Amortization expense
$
26,620
$
25,994
$
25,778
$
25,568
$
25,417
2019
2020
2021
2022
2023
(in thousands)
7.
Equity Method Investments
The Company’s equity method investments consist principally of minority ownership interests in rehabilitation businesses.
Equity method investments of $114.2 million and $146.9 million are presented as part of other assets on the consolidated balance
sheets as of December 31, 2017 and 2018, respectively. As of December 31, 2017 and 2018, these businesses consist primarily of
the following ownership interests:
BIR JV, LLP
OHRH, LLC
GlobalRehab—Scottsdale, LLC
Rehabilitation Institute of Denton, LLC
ES Rehabilitation, LLC
Coastal Virginia Rehabilitation, LLC
BHSM Rehabilitation, LLC
49.0%
49.0%
49.0%
50.0%
49.0%
49.0%
49.0%
Summarized combined financial information of the rehabilitation entities in which the Company has a minority ownership
interest is as follows:
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Equity
Total liabilities and equity
Revenues
Operating costs and expenses
Net income
December 31,
2017
2018
(in thousands)
$
$
$
102,908
79,364
182,272
37,113
13,751
131,408
182,272
$
125,435
118,270
243,705
43,792
16,338
183,575
243,705
$
$
$
$
For the Year Ended December 31,
2016
2017
2018
(in thousands)
$
320,078
$
336,349
$
274,952
43,410
289,224
45,648
393,034
342,603
48,535
F-26
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7.
Equity Method Investments (Continued)
The Company provides contracted services, principally employee leasing services, and charges management fees to related
parties affiliated through its equity investments. Net operating revenues generated from contracted services and management fees
charged to related parties affiliated through the Company’s equity investments were $164.2 million, $178.1 million, and $216.9
million for the years ended December 31, 2016, 2017, and 2018, respectively.
During the year ended December 31, 2016, the Company recognized a non-operating loss of $5.1 million related to the sale
of an equity method investment. Additionally, the Company received contingent proceeds related to the final settlement of its 2015
sale of an equity method investment, resulting in a non-operating gain of $2.5 million recognized during the year ended
December 31, 2016.
8.
Insurance Risk Programs
Under a number of the Company’s insurance programs, which include the Company’s employee health insurance, workers’
compensation, and professional malpractice liability insurance programs, the Company is liable for a portion of its losses before
it can attempt to recover from the applicable insurance carrier. The Company accrues for losses under an occurrence-based approach
whereby the Company estimates the losses that will be incurred in a respective accounting period and accrues that estimated
liability using actuarial methods. At December 31, 2017 and 2018, provisions for losses for professional liability risks retained by
the Company have been discounted at 3%. The Company recorded a liability of $157.1 million and $175.2 million related to these
programs at December 31, 2017 and 2018, respectively. If the Company did not discount the provisions for losses for professional
liability risks, the aggregate liability for all of the insurance risk programs would be approximately $162.1 million and $180.7
million at December 31, 2017 and 2018, respectively. The Company also recorded insurance proceeds receivable of $25.8 million
and $32.4 million at December 31, 2017 and 2018, respectively, for liabilities which exceed its deductibles and self-insured retention
limits and are recoverable through insurance policies.
F-27
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Long-Term Debt and Notes Payable
For purposes of this indebtedness footnote, references to Select exclude Concentra because the Concentra credit facilities
are non-recourse to Holdings and Select.
As of December 31, 2018, the Company’s long-term debt and notes payable were as follows (in thousands):
Principal
Outstanding
Unamortized
Premium
(Discount)
Unamortized
Issuance
Costs
Carrying
Value
Fair Value
Select:
6.375% senior notes
$
710,000
$
550
$
(4,642) $
705,908
$
706,450
Credit facilities:
Revolving facility
Term loan
Other
Total Select debt
Concentra:
Credit facilities:
Term loans
Other
Total Concentra debt
Total debt
20,000
1,129,875
56,415
1,916,290
1,414,175
7,916
1,422,091
—
(9,690)
—
(9,140)
(2,765)
—
(2,765)
—
(9,321)
(484)
(14,447)
(18,648)
—
(18,648)
20,000
1,110,864
55,931
1,892,703
1,392,762
7,916
1,400,678
$
3,338,381
$
(11,905) $
(33,095) $
3,293,381
$
18,400
1,076,206
55,931
1,856,987
1,357,802
7,916
1,365,718
3,222,705
Principal maturities of the Company’s long-term debt and notes payable are approximately as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Select:
6.375% senior notes
Credit facilities:
Revolving facility
Term loan
Other
Total Select debt
Concentra:
Credit facilities:
Term loans
Other
Total Concentra debt
Total debt
$
— $
— $
710,000
$
— $
— $
— $
710,000
—
—
6,612
6,612
33,878
3,375
37,253
—
—
25,706
25,706
—
346
346
—
—
221
20,000
98,812
—
710,221
118,812
—
—
—
—
—
20,000
1,031,063
1,129,875
23,876
56,415
1,054,939
1,916,290
—
346
346
1,140,297
349
1,140,646
240,000
335
240,335
—
3,165
3,165
1,414,175
7,916
1,422,091
$
43,865
$
26,052
$
710,567
$
1,259,458
$
240,335
$
1,058,104
$
3,338,381
F-28
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Long-Term Debt and Notes Payable (Continued)
As of December 31, 2017, the Company’s long-term debt and notes payable were as follows (in thousands):
Principal
Outstanding
Unamortized
Premium
(Discount)
Unamortized
Issuance
Costs
Carrying
Value
Fair Value
$
710,000
$
778
$
(6,553) $
704,225
$
727,750
230,000
1,141,375
36,877
2,118,252
619,175
6,653
625,828
—
(12,445)
—
(11,667)
(2,257)
—
(2,257)
—
(12,500)
(533)
(19,586)
(10,668)
—
(10,668)
230,000
1,116,430
36,344
2,086,999
606,250
6,653
612,903
211,600
1,154,215
36,344
2,129,909
625,173
6,653
631,826
$
2,744,080
$
(13,924) $
(30,254) $
2,699,902
$
2,761,735
Select:
6.375% senior notes
Credit facilities:
Revolving facility
Term loan
Other
Total Select debt
Concentra:
Credit facilities:
Term loan
Other
Total Concentra debt
Total debt
2017 Select Credit Facilities
On March 6, 2017, Select entered into a new senior secured credit agreement (the “Select credit agreement”) that provided
for $1.6 billion in senior secured credit facilities comprising a $1.15 billion, seven-year term loan (the “Select term loan”) and a
$450.0 million, five-year revolving credit facility (the “Select revolving facility” and, together with the Select term loan, the “Select
credit facilities”), including a $75.0 million sublimit for the issuance of standby letters of credit.
Select used borrowings under the Select credit facilities to: (i) repay the series E tranche B term loans due June 1, 2018, the
series F tranche B term loans due March 3, 2021, and the revolving facility, maturing March 1, 2018, under Select’s 2011 credit
facilities, and (ii) pay fees and expenses in connection with the refinancing.
Borrowings under the Select credit facilities initially had an interest rate equal to: (i) in the case of the Select term loan, the
Adjusted LIBO Rate (as defined in the Select credit agreement) plus 3.50% (subject to an Adjusted LIBO Rate floor of 1.00%),
or the Alternate Base Rate (as defined in the Select credit agreement) plus 2.50% (subject to an Alternate Base Rate floor of 2.00%),
and (ii) in the case of the Select revolving facility, the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25% or the
Alternate Base Rate plus a percentage ranging from 2.00% to 2.25%, in each case subject to a specified leverage ratio.
On March 22, 2018, Select entered into Amendment No. 1 to the Select credit agreement. Amendment No. 1 (i) decreased
the applicable interest rate on the Select term loan from the Adjusted LIBO Rate plus 3.50% to the Adjusted LIBO Rate plus a
percentage ranging from 2.50% to 2.75%, or from the Alternate Base Rate plus 2.50% to the Alternate Base Rate plus a percentage
ranging from 1.50% to 1.75%, in each case subject to a specified leverage ratio, (ii) decreased the applicable interest rate on the
loans outstanding under the Select revolving facility from the Adjusted LIBO Rate plus a percentage ranging from 3.00% to 3.25%
to the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75%, or from the Alternate Base Rate plus a percentage
ranging from 2.00% to 2.25% to the Alternate Base Rate plus a percentage ranging from 1.50% to 1.75%, in each case subject to
a specified leverage ratio, (iii) extended the maturity date for the Select term loan to March 6, 2025, and (iv) made certain other
technical amendments to the Select credit agreement as set forth therein.
F-29
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Long-Term Debt and Notes Payable (Continued)
On October 26, 2018, Select entered into Amendment No. 2 to the Select credit agreement. Among other things, Amendment
No. 2 (i) decreased the applicable interest rate on the Select term loan from the Adjusted LIBO Rate plus a percentage ranging
from 2.50% to 2.75% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate
plus a percentage ranging from 1.50% to 1.75% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in
each case subject to a specified leverage ratio, and (ii) decreased the applicable interest rate on the loans outstanding under the
Select revolving facility from the Adjusted LIBO Rate plus a percentage ranging from 2.50% to 2.75% to the Adjusted LIBO Rate
plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage ranging from 1.50% to 1.75%
to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to a specified leverage ratio. As
amended, the Adjusted LIBO Rate and Alternate Base Rate under the Select credit agreement are no longer subject to the floor.
As of December 31, 2018, the applicable interest rate for the Select term loan was the Adjusted LIBO Rate plus 2.50% or
the Alternate Base Rate plus 1.50%. The applicable interest rate for the Select revolving facility was the Adjusted LIBO Rate plus
2.50% or the Alternate Base Rate plus 1.50%.
The balance of the Select term loan will be payable on March 6, 2025; however, if Select’s 6.375% senior notes, which are
due June 1, 2021, are outstanding on March 1, 2021, the maturity date for the Select term loan will become March 1, 2021. The
Select revolving facility will be payable on March 6, 2022; however, if Select’s 6.375% senior notes are outstanding on February 1,
2021, the maturity date for the Select revolving facility will become February 1, 2021.
Select will be required to prepay borrowings under the Select credit facilities with (i) 100% of the net cash proceeds received
from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment
provisions and other customary carveouts and, to the extent required, the payment of certain indebtedness secured by liens having
priority over the debt under the Select credit facilities or subject to a first lien intercreditor agreement, (ii) 100% of the net cash
proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (iii) 50% of excess cash
flow (as defined in the Select credit agreement) if Select’s leverage ratio, as specified in the Select credit agreement, is greater
than 4.50 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 4.50 to 1.00 and greater than 4.00
to 1.00, in each case, reduced by the aggregate amount of term loans, revolving loans and certain other debt optionally prepaid
during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio
is less than or equal to 4.00 to 1.00.
The Select revolving facility requires Select to maintain a leverage ratio, as specified in the Select credit agreement, not to
exceed 6.25 to 1.00. The leverage ratio is tested quarterly. After March 31, 2019, the leverage ratio must not exceed 6.00 to 1.00.
Failure to comply with this covenant would result in an event of default under the Select revolving facility and, absent a waiver
or an amendment from the revolving lenders, preclude Select from making further borrowings under the Select revolving facility
and permit the revolving lenders to accelerate all outstanding borrowings under the Select revolving facility. The termination of
the Select revolving facility commitments and the acceleration of amounts outstanding thereunder would constitute an event of
default with respect to the Select term loan. For each of the four fiscal quarters during the year ended December 31, 2018, Select
was required to maintain its leverage ratio at less than 6.25 to 1.00. As of December 31, 2018, Select’s leverage ratio was 4.64 to
1.00.
The Select credit facilities also contain a number of other affirmative and restrictive covenants, including limitations on
mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions;
and dividends and restricted payments. The Select credit facilities contain events of default for non-payment of principal and
interest when due (subject, as to interest, to a grace period), cross-default and cross-acceleration provisions and an event of default
that would be triggered by a change of control.
Borrowings under the Select credit facilities are guaranteed by Holdings and substantially all of Select’s current domestic
subsidiaries and will be guaranteed by substantially all of Select’s future domestic subsidiaries. Borrowings under the Select credit
facilities are secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital
stock, the capital stock of Select’s domestic subsidiaries, and up to 65% of the capital stock of Select’s foreign subsidiaries held
directly by Select or a domestic subsidiary.
On the last day of each calendar quarter, Select is required to pay each lender a commitment fee in respect of any unused
commitments under the revolving facility, which is currently 0.50% per annum and subject to adjustment based on Select’s leverage
ratio, as specified in the Select credit agreement.
F-30
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Long-Term Debt and Notes Payable (Continued)
At December 31, 2018, Select had outstanding borrowings under the Select credit facilities consisting of a $1,129.9 million
Select term loan (excluding unamortized original issue discounts and debt issuance costs totaling $19.0 million) which matures
on March 6, 2025, and borrowings of $20.0 million (excluding letters of credit) under the Select revolving facility which matures
on March 6, 2022. At December 31, 2018, Select had $392.5 million of availability under the Select revolving facility after giving
effect to $37.5 million of outstanding letters of credit.
Excess Cash Flow
For the year ended December 31, 2018, the Select credit agreement will require a prepayment of borrowings of 50% of excess
cash flow. This will result in a prepayment of approximately $98.8 million. The Company expects to have the borrowing capacity
and intends to use borrowings under the Select revolving facility, which has a maturity date of March 6, 2022, to make all or a
portion of the required prepayment during the quarter ended March 31, 2019; accordingly, the prepayment is reflected in long-
term debt, net of current portion on the consolidated balance sheet as of December 31, 2018. Upon prepayment during the quarter
ended March 31, 2019, the remaining principal outstanding under the Select term loan will be due at maturity on March 6, 2025.
The Company was not required to make prepayments of borrowings as a result of excess cash flow from the years ended
December 31, 2016 and 2017.
Senior Notes
On May 28, 2013, Select issued and sold $600.0 million aggregate principal amount of 6.375% senior notes due June 1,
2021. On March 11, 2014, Select issued and sold $110.0 million aggregate principal amount of additional 6.375% senior notes,
due June 1, 2021, at 101.5% of the aggregate principal amount (the “additional notes”). The notes were issued as additional notes
under the indenture pursuant to which it previously issued $600.0 million of 6.375% senior notes due June 1, 2021 (the “existing
notes” and, together with the additional notes, the “senior notes”). The additional notes are treated as a single series with the
existing notes and have the same terms as those of the existing notes.
Interest on the senior notes accrues at the rate of 6.375% per annum and is payable semi-annually in cash in arrears on June 1
and December 1 of each year. The senior notes are Select’s senior unsecured obligations and rank equally in right of payment with
all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future
subordinated indebtedness. The senior notes are fully and unconditionally guaranteed by all of Select’s wholly owned subsidiaries.
The senior notes are guaranteed, jointly and severally, by Select’s direct or indirect existing and future domestic restricted
subsidiaries other than certain non-guarantor subsidiaries.
Select may redeem some or all of the senior notes at the following redemption prices (expressed in percentages of principal
amount on the redemption date), plus accrued interest, if any, if redeemed during the twelve-month period beginning on June 1 of
the years indicated below:
Year
2018
2019 and thereafter
Redemption Price
101.594%
100.000%
Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid
interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications
and exceptions.
F-31
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Long-Term Debt and Notes Payable (Continued)
The indenture relating to the senior notes contains covenants that, among other things, limit Select’s ability and the ability
of certain of its subsidiaries to grant liens on its assets; make dividend payments, other distributions or other restricted payments;
incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments; enter into sale and
leaseback transactions; merge, consolidate, transfer or dispose of substantially all of their assets; incur additional
indebtedness; make investments; sell assets, including capital stock of subsidiaries; use the proceeds from sales of assets, including
capital stock of restricted subsidiaries; and enter into transactions with affiliates. In addition, the indenture requires, among other
things, Select to provide financial and current reports to holders of the senior notes or file such reports electronically with the SEC.
These covenants are subject to a number of exceptions, limitations and qualifications set forth in the indenture.
Concentra credit facilities
Concentra First Lien Credit Agreement
On June 1, 2015, the Concentra first lien credit agreement provided for $500.0 million in first lien loans comprised of a
$450.0 million, seven-year term loan (the “existing Concentra first lien term loan”) and a $50.0 million, five-year revolving credit
facility (the “Concentra revolving facility”).
Borrowings under the Concentra first lien credit agreement had an interest rate equal to: (i) in the case of the existing
Concentra first lien term loan, the Adjusted LIBO Rate (as defined in the Concentra first lien credit agreement) plus 3.00% (subject
to an Adjusted LIBO Rate floor of 1.00%), or the Alternate Base Rate (as defined in the Concentra first lien credit agreement) plus
2.00% (subject to an Alternate Base Rate floor of 2.00%), and (ii) in the case of the Concentra revolving facility, the Adjusted
LIBO Rate plus a percentage ranging from 2.75% to 3.00%, or the Alternate Base Rate plus a percentage ranging from 1.75% to
2.00%, in each case based on Concentra’s leverage ratio, as specified in the Concentra first lien credit agreement.
On September 26, 2016, Concentra amended the Concentra first lien credit agreement. The credit agreement amendment
provided an additional $200.0 million of first lien term loans due June 1, 2022, the proceeds of which were used to prepay in full
Concentra’s then-outstanding $200.0 million eight-year second lien term loan due June 1, 2023, which was provided under a second
lien credit agreement, and also amended certain restrictive covenants to give Concentra greater operational flexibility. Borrowings
under the then-outstanding second lien term loan had an interest rate equal to the Adjusted LIBO Rate (as defined in the second
lien credit agreement) plus 8.00% (subject to an Adjusted LIBO Rate floor of 1.00%), or the Alternate Base Rate (as defined in
the second lien credit agreement) plus 7.00% (subject to an Alternate Base Rate floor of 2.00%).
On February 1, 2018, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i) an
additional $555.0 million in first lien term loans that, along with the existing Concentra first lien term loan, have a maturity date
of June 1, 2022 (collectively, the “Concentra first lien term loan”) and (ii) an additional $25.0 million of revolving loans, that along
with the existing $50.0 million revolving loans, comprise the five-year Concentra revolving facility under the terms of the existing
Concentra first lien credit agreement. The amendment also decreased the applicable interest rate on the Concentra first lien term
loan to the Adjusted LIBO Rate plus 2.75% (subject to an Adjusted LIBO Rate floor of 1.00%), or to the Alternate Base Rate plus
1.75% (subject to an Alternate Base Rate floor of 2.00%). Concentra used borrowings under the Concentra first lien credit agreement
and the Concentra second lien credit agreement, as described below, together with cash on hand, to pay the cash purchase price
for the issued and outstanding stock of U.S. HealthWorks to DHHC and to finance the redemption and reorganization transactions
executed under the Purchase Agreement (as described in Note 2), as well as to pay fees and expenses associated with the financing.
On October 26, 2018, Concentra amended the Concentra first lien credit agreement to, among other things, provide for (i)
an applicable interest rate on the Concentra first lien term loan of the Adjusted LIBO Rate plus a percentage ranging from 2.50%
to 2.75% (with 2.75% being the initial rate), or the Alternate Base Rate plus a percentage ranging from 1.50% to 1.75% (with
1.75% being the initial rate), in each case subject to a specified credit rating, and (ii) decrease the applicable interest rate on the
loans outstanding under the Concentra revolving facility from the Adjusted LIBO Rate plus a percentage ranging from 2.75% to
3.00% to the Adjusted LIBO Rate plus a percentage ranging from 2.25% to 2.50%, or from the Alternate Base Rate plus a percentage
ranging from 1.75% to 2.00% to the Alternate Base Rate plus a percentage ranging from 1.25% to 1.50%, in each case subject to
Concentra’s leverage ratio. As amended, the Adjusted LIBO Rate and Alternate Base Rate under the Concentra first lien credit
agreement are no longer subject to a floor.
F-32
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Long-Term Debt and Notes Payable (Continued)
As of December 31, 2018, the applicable interest rate for the Concentra first lien term loan was the Adjusted LIBO Rate plus
2.75% or the Alternate Base Rate plus 1.75%.
The Concentra first lien credit agreement requires Concentra to maintain a leverage ratio, as specified in the Concentra first
lien credit agreement, of 5.75 to 1.00 which is tested quarterly, but only if Revolving Exposure (as defined in the Concentra first
lien credit agreement) exceeds 30% of Revolving Commitments (as defined in the Concentra first lien credit agreement) on such
day. Failure to comply with this covenant would result in an event of default under the Concentra revolving facility only and,
absent a waiver or an amendment from the revolving lenders, preclude Concentra from making further borrowings under the
Concentra revolving facility and permit the revolving lenders to accelerate all outstanding borrowings under the Concentra revolving
facility. Upon such acceleration, Concentra’s failure to comply with the financial covenant would result in an event of default with
respect to the Concentra first lien term loan. Upon the acceleration of the revolving loans and the Concentra first lien term loan,
an event of default would result with respect to the Concentra second lien credit agreement.
Concentra Second Lien Credit Agreement
On February 1, 2018, Concentra entered into a second lien credit agreement (the “Concentra second lien credit agreement”
and, together with the Concentra first lien credit agreement, the “Concentra credit facilities”) with Concentra Holdings, Inc., Wells
Fargo Bank, National Association, as the administrative agent and the collateral agent, and the other lenders party thereto.
The Concentra second lien credit agreement provided for $240.0 million in term loans (the “Concentra second lien term
loan” and, together with the Concentra first lien term loan, the “Concentra term loans”) with a maturity date of June 1, 2023.
Borrowings under the Concentra second lien credit agreement bear interest at a rate equal to the Adjusted LIBO Rate (as defined
in the Concentra second lien credit agreement) plus 6.50% (subject to an Adjusted LIBO Rate floor of 1.00%), or the Alternate
Base Rate (as defined in the Concentra second lien credit agreement) plus 5.50% (subject to an Alternate Base Rate floor of 2.00%).
In the event that, on or prior to February 1, 2019, Concentra voluntarily prepays any of the Concentra second lien term loan
or refinances such term loans with net proceeds of other indebtedness, Concentra will pay a premium of 2.00% of the aggregate
principal amount of the Concentra second lien term loan prepaid. If, on or prior to February 1, 2020, Concentra voluntarily prepays
any of the Concentra second lien term loan or refinances such term loans with net proceeds of other indebtedness, Concentra will
pay a premium of 1.00% of the aggregate principal amount of the Concentra second lien term loan prepaid.
Concentra Credit Facilities
Concentra will be required to prepay borrowings under the Concentra credit facilities with (i) 100% of the net cash proceeds
received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to
reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens, (ii) 100% of the
net cash proceeds received from the issuance of debt obligations (other than certain permitted debt obligations), and (iii) 50% of
excess cash flow (as defined in the Concentra credit facilities) if Concentra’s leverage ratio is greater than 4.25 to 1.00 and 25%
of excess cash flow if Concentra’s leverage ratio is less than or equal to 4.25 to 1.00 and greater than 3.75 to 1.00, in each case,
reduced by the aggregate amount of term loans and certain debt secured on a pari passu basis optionally prepaid during the applicable
fiscal year and the aggregate amount of revolving commitments reduced permanently during the applicable fiscal year (other than
in connection with a refinancing). Concentra will not be required to prepay borrowings with excess cash flow if Concentra’s
leverage ratio is less than or equal to 3.75 to 1.00. No mandatory prepayment is required under the Concentra second lien credit
agreement to the extent any mandatory prepayment is applied to indebtedness secured by liens ranking prior to the Concentra
second lien credit agreement (and to the extent such debt is revolving indebtedness, such prepayment is accompanied by a permanent
reduction of the applicable commitments).
The Concentra credit facilities also contain a number of affirmative and restrictive covenants, including limitations on
mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions;
and dividends and restricted payments. The Concentra credit facilities contain events of default for non-payment of principal and
interest when due (subject to a grace period for interest), cross-default and cross-acceleration provisions and an event of default
that would be triggered by a change of control.
F-33
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
Long-Term Debt and Notes Payable (Continued)
The borrowings under the Concentra first lien credit agreement are guaranteed, on a first lien basis, and the borrowings under
the Concentra second lien credit agreement are guaranteed, on a second lien basis, by Concentra Holdings, Inc., Concentra, and
certain domestic subsidiaries of Concentra (subject, in each case, to permitted liens). These borrowings will also be guaranteed
by certain of Concentra’s future domestic subsidiaries. The borrowings under the Concentra credit facilities are secured by
substantially all of Concentra's and its domestic subsidiaries’ existing and future property and assets and by a pledge of Concentra's
capital stock, the capital stock of certain of Concentra's domestic subsidiaries and up to 65% of the voting capital stock and 100%
of the non-voting capital stock of Concentra's foreign subsidiaries, if any.
At December 31, 2018, Concentra had outstanding borrowings under the Concentra credit facilities consisting of the $1,414.2
million Concentra term loans (excluding unamortized discounts and debt issuance costs totaling $21.4 million). Concentra did not
have any borrowings under the Concentra revolving facility. At December 31, 2018, Concentra had $62.3 million of availability
under the Concentra revolving facility after giving effect to $12.7 million of outstanding letters of credit.
Excess Cash Flow Payment
For the year ended December 31, 2016, the Concentra first lien credit agreement required a prepayment of borrowings of
$23.1 million as a result of excess cash flow. The prepayment was made on March 1, 2017. Concentra was not required to make
a prepayment of borrowings as a result of excess cash flow from the year ended December 31, 2017.
For the year ended December 31, 2018, the Concentra first lien credit agreement will require a prepayment of borrowings
of 50% of excess cash flow. This will result in a prepayment of approximately $33.9 million. Concentra expects to use cash on
hand to make all or a portion of the required prepayment during the quarter ended March 31, 2019; accordingly, the prepayment
is reflected in current portion of long-term debt and notes payable on the consolidated balance sheet as of December 31, 2018.
Upon prepayment during the quarter ended March 31, 2019, the remaining principal outstanding under the Concentra first lien
term loan will be due at maturity on June 1, 2022.
Fair Value
The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’s 6.375%
senior notes and for its credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or
liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.
The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this
debt in the syndicated loan market. The fair value of Select’s 6.375% senior notes was based on quoted market prices. The carrying
amount of other debt, principally short-term notes payable, approximates fair value.
Loss on Early Retirement of Debt
During the year ended December 31, 2016, the Company refinanced a portion of the term loans outstanding under the 2011
Select credit facilities, which resulted in a loss on early retirement of debt of $0.8 million. Additionally, Concentra prepaid its
second lien term loan, which resulted in a loss on early retirement of debt of $10.9 million.
During the year ended December 31, 2017, the Company refinanced the 2011 Select credit facilities which resulted in a loss
on early retirement of debt of $19.7 million. The loss on early retirement of debt consisted of $6.5 million of debt extinguishment
losses and $13.2 million of debt modification losses.
During the year ended December 31, 2018, the Company refinanced the Select and Concentra credit facilities which resulted
in losses on early retirement of debt of $14.2 million. The losses on early retirement of debt consisted of $3.0 million of debt
extinguishment losses and $11.2 million of debt modification losses.
F-34
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stockholders’ Equity
The following table summarizes the share activity for Holdings:
Restricted stock granted
Common stock issued through stock option exercise
Unvested restricted stock forfeitures
Stock repurchases for satisfaction of tax obligations
For the Year Ended December 31,
2016
2017
2018
(in thousands)
1,426
202
82
232
1,598
227
27
280
1,491
185
168
357
Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth
of shares of its common stock. The program has been extended until December 31, 2019, and will remain in effect until then,
unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the
open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings
is funding this program with cash on hand and borrowings under the Select revolving facility.
Holdings did not repurchase shares during the years ended December 31, 2016, 2017, and 2018. The common stock repurchase
program has available capacity of $185.2 million as of December 31, 2018.
11. Segment Information
The Company’s reportable segments consist of the critical illness recovery hospital segment (previously referred to as the
long term acute care segment), rehabilitation hospital segment (previously referred to as the inpatient rehabilitation segment),
outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services and
certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. The accounting
policies of the segments are the same as those described in the summary of significant accounting policies.
The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings
excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense,
acquisition costs associated with Physiotherapy and U.S. HealthWorks, non-operating gain (loss), and equity in earnings (losses)
of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total
assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated
financial statements.
The following tables summarize selected financial data for the Company’s reportable segments. The segment results of
Holdings are identical to those of Select.
For the Year Ended December 31, 2016
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation(4)
Concentra
Other
Total
(in thousands)
Net operating revenues(1)
Adjusted EBITDA
Total assets(2)(3)
Capital expenditures
$
1,756,961
$
498,100
$
979,363
$
982,495
$
541
$
4,217,460
224,609
1,910,013
48,626
56,902
621,105
60,513
129,830
969,014
21,286
143,009
1,313,176
15,946
(88,543)
107,318
15,262
465,807
4,920,626
161,633
F-35
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Segment Information (Continued)
For the Year Ended December 31, 2017
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
(in thousands)
Net operating revenues(1)
Adjusted EBITDA
Total assets(3)
Capital expenditures
$
1,725,022
$
622,469
$
1,003,830
$
1,013,224
$
700
$
4,365,245
252,679
1,848,783
49,720
90,041
868,517
96,477
132,533
954,661
27,721
157,561
1,340,919
28,912
(94,822)
114,286
30,413
537,992
5,127,166
233,243
For the Year Ended December 31, 2018
Critical Illness
Recovery
Hospitals
Rehabilitation
Hospitals
Outpatient
Rehabilitation
Concentra(5)
Other
Total
(in thousands)
Net operating revenues(1)
Adjusted EBITDA
Total assets(3)
Capital expenditures
$
1,753,584
$
707,514
$
1,062,487
$
1,557,673
$
— $
5,081,258
243,015
1,771,605
40,855
108,927
894,192
42,389
142,005
251,977
(100,769)
1,002,819
2,178,868
30,553
42,205
116,781
11,279
645,155
5,964,265
167,281
A reconciliation of Adjusted EBITDA to income before income taxes is as follows:
For the Year Ended December 31, 2016
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation(4)
Concentra
Other
Total
(in thousands)
Adjusted EBITDA
$
224,609
$
56,902
$
129,830
$
143,009
$
(88,543)
Depreciation and amortization
Stock compensation expense
Physiotherapy acquisition costs
Income (loss) from operations
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating gain
Interest expense
Income before income taxes
(43,862)
(12,723)
(22,661)
(60,717)
—
—
—
—
—
—
(770)
—
(5,348)
(16,643)
(3,236)
$
180,747
$
44,179
$
107,169
$
81,522
$
(113,770) $
299,847
(11,626)
19,943
42,651
(170,081)
$
180,734
For the Year Ended December 31, 2017
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
Other
Total
(in thousands)
Adjusted EBITDA
Depreciation and amortization
Stock compensation expense
U.S. HealthWorks acquisition costs
$
252,679
$
90,041
$
132,533
$
157,561
$
(94,822)
(45,743)
(20,176)
(24,607)
—
—
—
—
—
—
(61,945)
(993)
(2,819)
(7,540)
(18,291)
—
Income (loss) from operations
$
206,936
$
69,865
$
107,926
$
91,804
$
(120,653) $
355,878
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating loss
Interest expense
Income before income taxes
F-36
(19,719)
21,054
(49)
(154,703)
$
202,461
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Segment Information (Continued)
For the Year Ended December 31, 2018
Critical Illness
Recovery
Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra(5)
Other
Total
(in thousands)
Adjusted EBITDA
Depreciation and amortization
Stock compensation expense
U.S. HealthWorks acquisition costs
$
243,015
$
108,927
$
142,005
$
251,977
$
(100,769)
(45,797)
(24,101)
(27,195)
—
—
—
—
—
—
(95,521)
(2,883)
(2,895)
(9,041)
(20,443)
—
Income (loss) from operations
$
197,218
$
84,826
$
114,810
$
150,678
$
(130,253) $
417,279
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating gain
Interest expense
Income before income taxes
(14,155)
21,905
9,016
(198,493)
$
235,552
_______________________________________________________________________________
(1)
Net operating revenues were retrospectively conformed to reflect the adoption of Topic 606, Revenue from Contracts
with Customers.
(2)
(3)
(4)
Total assets were retrospectively conformed to reflect the adoption of ASU 2015-17, Balance Sheet Classification of
Deferred Taxes, which resulted in a reduction to total assets of $23.8 million.
The critical illness recovery hospital segment includes $24.4 million, $9.8 million, and $9.8 million in real estate assets
held for sale on December 31, 2016, 2017, and 2018, respectively.
The outpatient rehabilitation segment includes the operating results of the Company’s contract therapy businesses through
March 31, 2016 and Physiotherapy beginning March 4, 2016.
(5)
The Concentra segment includes the operating results of U.S. HealthWorks beginning February 1, 2018.
F-37
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Revenue from Contracts with Customers
The following tables disaggregate the Company’s net operating revenues by operating segment:
For the Year Ended December 31, 2016
Critical Illness
Recovery Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
(in thousands)
$
$
936,083
$
191,037
$
136,283
$
797,431
1,733,514
23,447
161,821
352,858
145,242
739,102
875,385
103,978
1,756,961
$
498,100
$
979,363
$
2,235
969,682
971,917
10,578
982,495
For the Year Ended December 31, 2017
Critical Illness
Recovery Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
(in thousands)
$
$
903,503
$
259,221
$
148,403
$
810,723
1,714,226
10,796
207,196
466,417
156,052
739,531
887,934
115,896
2,128
1,002,787
1,004,915
8,309
1,725,022
$
622,469
$
1,003,830
$
1,013,224
For the Year Ended December 31, 2018
Critical Illness
Recovery Hospital
Rehabilitation
Hospital
Outpatient
Rehabilitation
Concentra
(in thousands)
$
$
893,429
$
293,913
$
161,054
$
847,447
1,740,876
12,708
254,215
548,128
159,386
762,247
923,301
139,186
2,168
1,545,852
1,548,020
9,653
1,753,584
$
707,514
$
1,062,487
$
1,557,673
Patient service revenues:
Medicare
Non-Medicare
Total patient services revenues
Other revenues
Total net operating revenues
Patient service revenues:
Medicare
Non-Medicare
Total patient services revenues
Other revenues
Total net operating revenues
Patient service revenues:
Medicare
Non-Medicare
Total patient services revenues
Other revenues
Total net operating revenues
13. Stock-based Compensation
Holdings awards stock-based compensation in the form of stock options and restricted stock awards under its equity incentive
plans. On June 2, 2016, Holdings adopted the Select Medical Holdings Corporation 2016 Equity Incentive Plan (the “Plan”) and
its existing plans were frozen. The total capacity for restricted stock and stock option awards under the Plan is 7,698,700 awards,
as adjusted for forfeited restricted stock and stock options awards through December 31, 2018. As of December 31, 2018, Holdings
has capacity to issue 3,184,185 restricted stock and stock option awards under the Plan. Holdings’ equity plan allows for authorized
but previously unissued shares or shares previously issued and outstanding and reacquired by Holdings to satisfy these awards.
On November 8, 2005, the board of directors of Holdings adopted a director equity incentive plan (“Director Plan”) and on
August 12, 2009, the board of directors and stockholders of Holdings approved an amendment and restatement of the Director
Plan. This amendment authorized Holdings to issue under the Director Plan options to purchase up to 75,000 shares of its common
stock and restricted stock awards covering up to 150,000 shares of its common stock. On June 2, 2016, upon the adoption of the
Select Medical Holdings Corporation 2016 Equity Incentive Plan, the Director Plan was frozen.
F-38
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Stock-based Compensation (Continued)
The Company measures the compensation costs of stock-based compensation arrangements based on the grant-date fair
value and recognizes the costs over the period during which employees are required to provide services. The Company values
restricted stock awards by using the closing market price of its stock on the date of grant. The Company values stock options using
the Black-Scholes option-pricing model. There were no options granted during the year ended December 31, 2018. The Company
recognizes any forfeitures as they occur.
Transactions related to restricted stock awards are as follows:
Unvested balance, January 1, 2018
Granted
Vested
Forfeited
Unvested balance, December 31, 2018
Shares
Weighted Average
Grant Date
Fair Value
(share amounts in thousands)
4,468
$
1,491
(1,341)
(168)
4,450
$
13.85
19.72
14.22
14.47
15.68
For the years ended December 31, 2016, 2017, and 2018, the weighted average grant date fair value of restricted stock awards
granted was $11.57, $15.84, and $19.72, respectively. For the years ended December 31, 2016, 2017, and 2018, the total fair value
of restricted stock awards vested was $8.4 million, $17.1 million, and $19.1 million, respectively.
As of December 31, 2018, there were 105,000 stock options outstanding and exercisable. The outstanding and exercisable
shares have a weighted average exercise price of $9.18 and a weighted average remaining contractual life of 0.9 years. As of
December 31, 2017, there were 291,775 stock options outstanding and exercisable which had a weighted average exercise price
of $9.26.
During the year ended December 31, 2018, 185,275 options were exercised, which had a weighted average exercise price
of $9.30, and 1,500 options were canceled, which had a weighted average exercise price of $10.00. For the years ended December 31,
2016, 2017, and 2018, the total intrinsic value of options exercised was $0.8 million, $1.6 million, and $1.8 million, respectively.
At December 31, 2018, the aggregate intrinsic value of options outstanding and options exercisable was $0.6 million.
Stock compensation expense recognized by the Company was as follows:
Stock compensation expense:
Included in general and administrative
Included in cost of services
Total
For the Year Ended December 31,
2016
2017
2018
(in thousands)
$
$
14,607
2,806
17,413
$
$
15,706
3,578
19,284
$
$
17,604
5,722
23,326
Stock compensation expense based on current stock-based awards for each of the next five years is estimated to be as follows:
Stock compensation expense
$
22,998
$
16,566
$
8,976
$
3,302
$
213
2019
2020
2021
2022
2023
(in thousands)
F-39
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.
Income Taxes
The components of the Company’s income tax expense for the years ended December 31, 2016, 2017, and 2018 were as
follows:
Current income tax expense:
Federal
State and local
Total current income tax expense
Deferred income tax expense (benefit)
Total income tax expense (benefit)
For the Year Ended December 31,
2016
2017
2018
(in thousands)
$
$
54,726
$
45,809
$
13,329
68,055
(12,591)
8,331
54,140
(72,324)
55,464
$
(18,184) $
36,072
15,321
51,393
7,217
58,610
Reconciliations of the statutory federal income tax rate to the effective income tax rate are as follows:
Federal income tax at statutory rate
State and local income taxes, less federal income tax benefit
Permanent differences
Tax benefit from the sale of businesses
Valuation allowance
Uncertain tax positions
Non-controlling interest
Stock-based compensation
Deferred income taxes - state income tax rate adjustment
Deferred income taxes - tax legislation rate adjustment
Other
Total effective income tax rate
For the Year Ended December 31,
2016
2017
2018
35.0%
35.0 %
21.0%
3.6
1.4
(6.7)
0.2
(1.3)
(0.5)
(0.7)
—
—
(0.3)
30.7%
3.7
1.7
—
(7.3)
(0.6)
0.5
(1.3)
(2.8)
(37.5)
(0.4)
(9.0)%
5.0
2.1
—
0.5
(0.8)
(2.1)
(2.2)
0.4
—
1.0
24.9%
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law which made significant changes to the Internal
Revenue Code. These changes included a corporate tax rate decrease to 21% from 35% effective after December 31, 2017. ASC
Topic 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the
period in which the legislation is enacted at the income tax rates in which the deferred tax balances are expected to reverse. While
the effective date of the new corporate tax rate was January 1, 2018, the Company recorded the effect on its deferred tax balances
as of December 31, 2017. The Company recognized an income tax benefit of $71.5 million to reflect these effects during the
year ended December 31, 2017. The Company’s accounting for the effects of the Tax Cuts and Jobs Act is complete as of December
31, 2018.
F-40
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.
Income Taxes (Continued)
The Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets
Allowance for doubtful accounts
Compensation and benefit-related accruals
Professional malpractice liability insurance
Deferred revenue
Federal and state net operating loss and state tax credit carryforwards
Interest limitation carryforward
Stock awards
Equity investments
Other
Deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities
Deferred income
Investment in unconsolidated affiliates
Depreciation and amortization
Deferred financing costs
Other
Deferred tax liabilities
Deferred tax liabilities, net of deferred tax assets
December 31,
2017
2018
(in thousands)
$
8,792
$
50,936
11,036
319
36,112
—
6,591
1,452
3,543
118,781
(12,986)
105,795
$
$
(19,608) $
(4,457)
(179,055)
(4,528)
(3,673)
(211,321) $
(105,526) $
$
$
$
$
$
10,313
51,900
13,644
209
40,163
4,675
5,695
2,055
3,271
131,925
(17,893)
114,032
(13,891)
(5,653)
(217,950)
(8,324)
(3,488)
(249,306)
(135,274)
The Company’s deferred tax assets and liabilities are included in the consolidated balance sheet captions as follows:
Other assets
Non-current deferred tax liability
December 31,
2017
2018
(in thousands)
$
$
19,391
$
(124,917)
(105,526) $
18,621
(153,895)
(135,274)
As of December 31, 2017 and 2018, the Company’s valuation allowance is primarily attributable to the uncertainty regarding
the realization of state net operating losses and other net deferred tax assets of loss entities. The state net deferred tax assets have
a full valuation allowance recorded for entities that have a cumulative history of pre-tax losses (current year in addition to the two
prior years).
For the year ended December 31, 2017, the Company recorded a net valuation allowance release of $13.4 million which was
comprised of a valuation release of $14.1 million related to federal net operating losses acquired as part of the Physiotherapy
acquisition and $0.2 million of expired state net operating losses, partially offset by a $0.9 million increase in the valuation allowance
for newly generated state net operating losses. For the year ended December 31, 2018, the Company recorded a net valuation
allowance increase of $4.9 million. This increase was comprised of a $3.9 million valuation allowance recognized on net operating
losses acquired and recorded as part of U.S. HealthWorks’ opening balance sheet, and a $1.0 million valuation allowance recognized
as a result of a net change in state net operating losses for the year ended December 31, 2018. The changes in the Company’s
valuation allowance were recognized as a result of management’s reassessment of the amount of its deferred tax assets that are
more likely than not to be realized.
F-41
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14.
Income Taxes (Continued)
At December 31, 2017 and 2018, the Company’s net deferred tax liabilities of approximately $105.5 million and $135.3
million, respectively, consist of items which have been recognized for tax reporting purposes, but which will increase tax on returns
to be filed in the future, and include the use of net operating loss carryforwards. The Company has performed an assessment of
positive and negative evidence regarding the realization of the net deferred tax assets. This assessment included a review of legal
entities with three years of cumulative losses, estimates of projected future taxable income, the effects on future taxable income
resulting from the reversal of existing deferred tax liabilities in future periods, and the impact of tax planning strategies that
management would and could implement in order to keep deferred tax assets from expiring unused. Although realization is not
assured, based on the Company’s assessment, it has concluded that it is more likely than not that such assets, net of the determined
valuation allowance, will be realized.
The total state net operating losses are approximately $698.1 million. State net operating loss carryforwards expire and are
subject to valuation allowances as follows:
2019
2020
2021
2022
Thereafter through 2037
15. Retirement Savings Plan
State Net
Operating Losses
Gross Valuation
Allowance
(in thousands)
$
11,508
$
16,798
12,103
36,556
621,161
5,830
14,619
11,395
35,564
447,368
Select sponsors a defined contribution retirement savings plan for substantially all of its employees. Employees who are not
classified as highly compensated employees (“HCE’s”) may contribute up to 30% of their salary; HCE’s may contribute up to 8%
of their salary. The plan provides a discretionary company match which is determined annually. Currently, Select matches 25% of
the first 6% of compensation employees contribute to the plan. The employees vest in the employer contributions over a three-
year period beginning on the employee’s hire date. The expense incurred by Select related to this plan was $14.7 million, $15.2
million, and $19.5 million during the years ended December 31, 2016, 2017, and 2018, respectively.
16. Earnings per Share
The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating
securities outstanding. There were no dividends declared or contractual dividends paid for the years ended December 31, 2016,
2017, and 2018.
Basic EPS
Diluted EPS
For the Year Ended December 31,
For the Year Ended December 31,
2016
2017
2018
2016
2017
2018
(in thousands)
Net income
$
125,270
$
220,645
$
176,942
$
125,270
$
220,645
$
176,942
Less: net income attributable to non-controlling interests
Net income attributable to the Company
Less: net income attributable to participating securities
9,859
115,411
3,521
43,461
177,184
5,758
39,102
137,840
4,551
9,859
115,411
3,517
43,461
177,184
5,751
39,102
137,840
4,548
Net income attributable to common shares
$
111,890
$
171,426
$
133,289
$
111,894
$
171,433
$
133,292
F-42
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Earnings per Share (Continued)
The following tables set forth the computation of EPS under the two-class method:
Common shares
Participating securities
Total Company
Common shares
Participating securities
Total Company
Common shares
Participating securities
Total Company
For the Year Ended December 31, 2018
Net Income
Allocation
Shares(1)
Basic EPS
Net Income
Allocation
Shares(1)
Diluted EPS
(in thousands, except for per share amounts)
$
$
133,289
4,551
137,840
130,172
4,444
$
$
1.02
1.02
$
$
133,292
4,548
137,840
130,256
4,444
$
$
1.02
1.02
For the Year Ended December 31, 2017
Net Income
Allocation
Shares(1)
Basic EPS
Net Income
Allocation
Shares(1)
Diluted EPS
(in thousands, except for per share amounts)
$
$
171,426
5,758
177,184
128,955
4,332
$
$
1.33
1.33
$
$
171,433
5,751
177,184
129,126
4,332
$
$
1.33
1.33
For the Year Ended December 31, 2016
Net Income
Allocation
Shares(1)
Basic EPS
Net Income
Allocation
Shares(1)
Diluted EPS
(in thousands, except for per share amounts)
$
$
111,890
3,521
115,411
127,813
4,022
$
$
0.88
0.88
$
$
111,894
3,517
115,411
127,968
4,022
$
$
0.87
0.87
_______________________________________________________________________________
(1)
Represents the weighted average share count outstanding during the period.
F-43
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Commitments and Contingencies
Leases
The Company leases facilities and equipment from unrelated parties under operating leases. At December 31, 2018, future
minimum lease obligations on long-term, non-cancelable operating leases are approximately as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
261,915
224,306
185,587
142,655
104,866
470,694
$
1,390,023
For the years ended December 31, 2016, 2017, and 2018, total rent expense for facility and equipment operating leases,
including cancelable leases, was $265.1 million, $267.4 million, and $307.8 million, respectively. For the years ended December 31,
2016, 2017, and 2018, facility rent expense to unrelated parties, a component of total rent expense, was $220.8 million, $224.2
million, and $262.6 million, respectively.
The Company rents its corporate office space from related parties. The Company made payments for office rent, leasehold
improvements, and miscellaneous expenses of $5.0 million, $6.2 million, and $6.3 million to related parties for the years ended
December 31, 2016, 2017, and 2018, respectively.
As of December 31, 2018, future rental commitments under outstanding agreements with related parties are approximately
as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Construction Commitments
$
$
5,931
7,405
7,568
7,500
2,893
13,344
44,641
At December 31, 2018, the Company had outstanding commitments under construction contracts related to new construction,
improvements, and renovations totaling approximately $21.6 million.
F-44
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Commitments and Contingencies (Continued)
Litigation
The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory
and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate
outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could
potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers
for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional
investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material
adverse effect on the Company’s business, financial position, results of operations, and liquidity.
To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance
and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state
where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the
Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with
a total annual aggregate limit up to $40.0 million. The Company’s insurance for the professional liability coverage is written on
a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages
apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous
programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs
ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs
has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make
adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella
liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s
other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles
and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company
to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will
not have a material adverse effect on its financial position, results of operations, or cash flows.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits
typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or
not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can
involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The
Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to
time in the future.
Evansville Litigation. On October 19, 2015, the plaintiff-relators filed a Second Amended Complaint in United States of
America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital-
Evansville, LLC (“SSH Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in
the United States District Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States
under the federal False Claims Act. The plaintiff-relators are the former CEO and two former case managers at SSH Evansville,
and the defendants currently include the Company, SSH Evansville, a subsidiary of the Company serving as common paymaster
for its employees, and a physician who practices at SSH Evansville. The plaintiff-relators allege that SSH Evansville discharged
patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals,
up coded diagnoses at admission, and admitted patients for whom long term acute care was not medically necessary. They also
allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a
prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal
magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow
the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States
Department of Justice notified the District Court of its decision not to intervene in the case.
In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including
that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on
fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff relators
did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.
F-45
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Commitments and Contingencies (Continued)
Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims
arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar
language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied
the defendants’ Motion to Dismiss. It ruled that the plaintiff-relators alleged substantially the same conduct as had been publicly
disclosed and that the plaintiff-relators are not original sources, so that the public disclosure bar requires dismissal of all
non retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the
public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23,
2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the
plaintiff-relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients
with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the plaintiff relators’ claims
arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the plaintiff-
relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving
all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate
the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that
plaintiff-relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30,
2016, and that the plaintiff-relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using
statistical sampling. The plaintiff-relators have appealed this decision to the District Judge.
The Company intends to vigorously defend this action, but at this time the Company is unable to predict the timing and
outcome of this matter.
Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui
tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc.
(“SSH Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal
Cheek, No. 16 347 LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at
SSH Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The
corporate defendants were served in March 2017. In the complaint, the plaintiff relator alleges that the Select defendants and an
individual defendant, who is a former health information manager at SSH Wilmington, violated the False Claims Act and the
Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and
failing to properly examine the credentials of medical practitioners at SSH Wilmington. In response to the Select defendants’
motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of
action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the
Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material
to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted
false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff relator’s
claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations,
and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss
claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court
dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.
In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of
Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH Wilmington, C.A. No.
N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware
Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint.
The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended
Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018,
the Court stayed the Delaware Complaint pending the outcome of the federal case.
The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and
outcome of this matter.
F-46
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Commitments and Contingencies (Continued)
Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the
District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted
to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company
operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary.
The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance
with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether
excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether
the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative
proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate
with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes
Select’s 6.375% senior notes are fully and unconditionally and jointly and severally guaranteed, except for customary
limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors
are defined as subsidiaries where Select, or a subsidiary of Select, holds all of the outstanding ownership interests. Certain of
Select’s subsidiaries did not guarantee the 6.375% senior notes (the “Non-Guarantor Subsidiaries” and Concentra Group Holdings
Parent and its subsidiaries, the “Non-Guarantor Concentra”).
Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating
financial information for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra.
The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by
Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary
Guarantors are not presented.
Certain reclassifications have been made to prior reported amounts in order to conform to the current year guarantor structure.
F-47
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2018
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
(in thousands)
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
$
$
$
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable
Intercompany receivables
Prepaid income taxes
Other current assets
Total Current Assets
Property and equipment, net
Investment in affiliates
Goodwill
Identifiable intangible assets, net
Other assets
Total Assets
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts
Current portion of long-term debt and notes payable
Accounts payable
Intercompany payables
Accrued payroll
Accrued vacation
Accrued interest
Accrued other
Income taxes payable
Total Current Liabilities
Long-term debt, net of current portion
Non-current deferred tax liability
Other non-current liabilities
Total Liabilities
Redeemable non-controlling interests
Stockholders’ Equity:
Common stock
Capital in excess of par
Retained earnings (accumulated deficit)
Subsidiary investment
77
—
—
10,205
17,866
28,148
30,103
4,497,167
—
3
37,281
4,363
14,033
1,787,184
15,533
4,613
5,996
60,056
—
1,916,861
1,837,241
—
35,558
3,789,660
—
0
970,156
(167,114)
—
—
$
7,574
$
4,411
$
163,116
$
397,674
1,787,184
5,711
31,181
2,229,324
625,947
127,036
2,104,288
102,120
145,467
118,683
83,230
—
14,048
220,372
103,006
—
—
5,020
33,417
190,319
—
(1,870,414) (a)
4,623
27,036
385,094
220,754
—
—
(1,870,414)
—
—
(4,624,203) (b)(c)
1,216,438
330,550
26,032
—
—
(8,685) (e)
4,592,702
$
5,334,182
$
361,815
$
2,178,868
$
(6,503,302)
25,083
$
— $
— $
— $
—
—
—
—
—
248
84,343
83,230
99,803
60,989
22
61,226
2,366
392,227
448
101,214
59,901
553,790
—
—
—
1,547,018
3,233,374
4,780,392
—
2,001
20,956
—
5,936
13,942
3
17,098
190
60,126
48,402
994
9,194
37,253
27,361
—
(1,870,414) (a)
51,114
31,116
6,116
52,311
1,115
206,386
1,363,425
60,372
54,287
—
—
—
—
—
(1,870,414)
—
(8,685) (e)
—
118,716
1,684,470
(1,879,099)
—
—
—
(29,553)
272,652
243,099
—
243,099
18,525
761,963 (d)
—
—
12,355
457,974
470,329
5,544
475,873
—
—
(1,529,820) (c)(d)
(3,964,000) (b)(d)
(5,493,820)
107,654 (d)
(5,386,166)
$
$
$
175,178
706,676
—
20,539
90,131
992,524
979,810
—
3,320,726
437,693
233,512
5,964,265
25,083
43,865
146,693
—
172,386
110,660
12,137
190,691
3,671
705,186
3,249,516
153,895
158,940
4,267,537
780,488
0
970,156
(167,114)
—
803,042
113,198
916,240
Total Select Medical Corporation Stockholders’ Equity
803,042
Non-controlling interests
Total Equity
803,042
4,780,392
Total Liabilities and Equity
$
4,592,702
$
5,334,182
$
361,815
$
2,178,868
$
(6,503,302)
$
5,964,265
_______________________________________________________________________________
(a)
(b)
(c)
(d)
(e)
Elimination of intercompany balances.
Elimination of investments in consolidated subsidiaries.
Elimination of investments in consolidated subsidiaries’ earnings.
Reclassification of equity attributable to non-controlling interests.
Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.
F-48
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2018
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
Net operating revenues
Costs and expenses:
$
— $
2,755,745
$
767,840
$
1,557,673
$
(in thousands)
Cost of services, exclusive of depreciation and amortization
2,838
2,376,111
653,528
1,308,579
General and administrative
Depreciation and amortization
Total costs and expenses
Income (loss) from operations
Other income and expense:
Intercompany interest and royalty fees
Intercompany management fees
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating gain
Interest income (expense)
Income (loss) before income taxes
Income tax expense
Equity in earnings of consolidated subsidiaries
Net income
Less: Net income attributable to non-controlling interests
118,128
8,913
245
80,422
129,879
2,456,778
(129,879)
298,967
—
16,799
670,327
97,513
2,895
95,521
1,406,995
150,678
28,058
211,861
(4,654)
—
1,656
(117,520)
(10,478)
3,419
151,737
137,840
—
(12,676)
(166,857)
(14,187)
(45,004)
—
21,870
7,360
328
148,992
42,713
24,404
130,683
97
—
35
—
(736)
37,621
553
—
37,068
12,664
(1,195)
—
(9,501)
—
—
(80,565)
59,417
11,925
—
(176,141) (a)
47,492
26,341
(176,141)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
5,081,258
4,341,056
121,268
201,655
4,663,979
417,279
—
—
(14,155)
21,905
9,016
(198,493)
235,552
58,610
—
176,942
39,102
Net income attributable to Select Medical Corporation
$
137,840
$
130,586
$
24,404
$
21,151
$
(176,141)
$
137,840
_______________________________________________________________________________
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-49
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2018
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Distributions from unconsolidated subsidiaries
Depreciation and amortization
Provision for bad debts
Equity in earnings of unconsolidated subsidiaries
Equity in earnings of consolidated subsidiaries
Loss on extinguishment of debt
Gain on sale of assets and businesses
Stock compensation expense
Amortization of debt discount, premium and issuance costs
Deferred income taxes
Changes in operating assets and liabilities, net of effects of business
combinations:
Accounts receivable
Other current assets
Other assets
Accounts payable
Accrued expenses
Net cash provided by operating activities
Investing activities
Business combinations, net of cash acquired
Purchases of property and equipment
Investment in businesses
Proceeds from sale of assets and businesses
Net cash used in investing activities
Financing activities
Borrowings on revolving facilities
Payments on revolving facilities
Proceeds from term loans
Payments on term loans
Revolving facility debt issuance costs
Borrowings of other debt
Principal payments on other debt
Dividends paid to Holdings
Equity investment by Holdings
Intercompany
Decrease in overdrafts
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
(in thousands)
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
$
137,840
$
130,683
$
37,068
$
47,492
$
(176,141) (a)
$
176,942
15,687
80,422
(485)
(21,870)
(24,404)
—
(7,507)
—
—
7,489
52,786
(960)
(9,053)
(2,447)
14,697
235,038
(4,965)
(76,443)
(13,477)
5,042
(89,843)
—
—
—
—
—
—
(621)
—
—
34
16,799
318
(35)
—
—
(16)
—
—
242
3,727
(1,017)
2,068
2,519
8,863
70,570
(204)
(38,914)
—
48
—
95,521
64
—
—
1,044
—
2,883
7,372
(8,424)
(1,938)
2,670
23,941
(4,712)
(16,760)
149,153
(517,965)
(42,205)
(5)
12
(39,070)
(560,163)
—
—
—
—
—
30,202
(6,816)
—
—
—
—
779,885
—
(549)
4,559
(6,512)
—
—
(140,406)
(46,064)
(18,145)
—
8,913
—
—
(151,737)
1,955
(1,645)
20,443
5,740
7,910
—
(4,845)
(9,099)
2,862
21,096
39,433
—
(9,719)
—
1,658
(8,061)
595,000
(805,000)
(62)
(11,500)
(1,090)
7,457
(11,293)
(6,837)
1,722
204,615
(4,380)
—
—
(31,368)
—
—
—
—
176,141 (a)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,721
201,655
(103)
(21,905)
—
2,999
(9,168)
23,326
13,112
7,217
54,575
(4,152)
7,857
(1,778)
27,896
494,194
(523,134)
(167,281)
(13,482)
6,760
(697,137)
595,000
(805,000)
779,823
(11,500)
(1,639)
42,218
(25,242)
(6,837)
1,722
—
(4,380)
2,926
(311,519)
255,572
52,629
122,549
175,178
$
Proceeds from issuance of non-controlling interests
Distributions to and purchases of non-controlling interests
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
—
—
(1,450)
(142,477)
4
73
77
$
2,718
4,856
7,574
$
—
957
(9,929)
(31,650)
(150)
4,561
4,411
—
1,969
(300,140)
461,067
50,057
113,059
$
163,116
$
_______________________________________________________________________________
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-50
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2017
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
(in thousands)
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
$
$
$
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable
Intercompany receivables
Prepaid income taxes
Other current assets
Total Current Assets
Property and equipment, net
Investment in affiliates
Goodwill
Identifiable intangible assets, net
Other assets
Total Assets
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts
Current portion of long-term debt and notes payable
Accounts payable
Intercompany payables
Accrued payroll
Accrued vacation
Accrued interest
Accrued other
Income taxes payable
Total Current Liabilities
Long-term debt, net of current portion
Non-current deferred tax liability
Other non-current liabilities
Total Liabilities
Redeemable non-controlling interests
Stockholders’ Equity:
Common stock
Capital in excess of par
Retained earnings (accumulated deficit)
Subsidiary investment
73
—
—
22,704
13,021
35,798
39,836
4,524,385
—
—
36,494
16,635
12,504
1,598,212
16,736
4,083
17,479
39,219
—
1,734,331
2,042,555
—
36,259
3,813,145
—
0
947,370
(124,002)
—
—
$
4,856
$
4,561
$
113,059
$
449,493
1,598,212
5,703
30,209
2,088,473
623,085
124,104
2,108,270
104,067
98,575
122,728
60,707
31
13,031
201,058
79,013
—
—
5,046
35,440
119,511
—
(1,658,919) (a)
2,949
18,897
254,416
170,657
—
—
(1,658,919)
—
—
(4,648,489) (b)(c)
674,542
217,406
23,898
—
—
(9,989) (e)
4,636,513
$
5,146,574
$
320,557
$
1,340,919
$
(6,317,397)
29,463
$
— $
— $
— $
—
—
—
—
—
740
85,489
60,707
98,887
58,355
7
57,378
1,302
362,865
127
88,376
56,721
508,089
—
—
—
1,416,857
3,221,628
4,638,485
—
2,212
17,475
—
4,819
12,295
6
12,599
30
49,436
24,730
780
8,138
83,084
—
—
—
(35,942)
273,415
237,473
—
237,473
2,600
12,726
—
(1,658,919) (a)
40,120
18,142
2,393
33,970
7,739
117,690
610,303
45,750
44,591
818,334
16,270
—
—
64,626
437,779
502,405
3,910
506,315
—
—
—
—
—
(1,658,919)
—
(9,989) (e)
—
(1,668,908)
624,548 (d)
—
—
(1,445,541) (c)(d)
(3,932,822) (b)(d)
(5,378,363)
105,326 (d)
(5,273,037)
$
$
$
122,549
691,732
—
31,387
75,158
920,826
912,591
—
2,782,812
326,519
184,418
5,127,166
29,463
22,187
128,194
—
160,562
92,875
19,885
143,166
9,071
605,403
2,677,715
124,917
145,709
3,553,744
640,818
0
947,370
(124,002)
—
823,368
109,236
932,604
Total Select Medical Corporation Stockholders’ Equity
823,368
Non-controlling interests
Total Equity
823,368
4,638,485
Total Liabilities and Equity
$
4,636,513
$
5,146,574
$
320,557
$
1,340,919
$
(6,317,397)
$
5,127,166
_______________________________________________________________________________
(a)
(b)
(c)
(d)
(e)
Elimination of intercompany balances.
Elimination of investments in consolidated subsidiaries.
Elimination of investments in consolidated subsidiaries’ earnings.
Reclassification of equity attributable to non-controlling interests.
Reclassification of non-current deferred tax asset to report net non-current deferred tax liability in consolidation.
F-51
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2017
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
(in thousands)
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
Net operating revenues
Costs and expenses:
$
700
$
2,685,308
$
666,013
$
1,013,224
$
Cost of services, exclusive of depreciation and amortization
2,585
2,299,360
576,708
General and administrative
Depreciation and amortization
Total costs and expenses
Income (loss) from operations
Other income and expense:
Intercompany interest and royalty fees
Intercompany management fees
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating loss
Interest income (expense)
Income (loss) before income taxes
Income tax expense (benefit)
Equity in earnings of consolidated subsidiaries
Net income
Less: Net income attributable to non-controlling interests
111,069
7,540
159
76,408
121,194
2,375,927
(120,494)
309,381
32,828
220,601
(19,719)
—
—
(124,406)
(11,190)
(8,753)
179,621
177,184
—
(18,369)
(180,588)
—
20,973
(49)
298
131,646
(2,549)
13,536
147,731
120
—
14,118
590,826
75,187
(14,459)
(40,013)
—
81
—
(87)
20,709
557
—
20,152
6,616
856,656
2,819
61,945
921,420
91,804
—
—
—
—
—
(30,508)
61,296
(7,439)
—
68,735
36,725
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(193,157) (a)
(193,157)
—
$
4,365,245
3,735,309
114,047
160,011
4,009,367
355,878
—
—
(19,719)
21,054
(49)
(154,703)
202,461
(18,184)
—
220,645
43,461
Net income attributable to Select Medical Corporation
$
177,184
$
147,611
$
13,536
$
32,010
$
(193,157)
$
177,184
______________________________________________________________________________
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-52
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2017
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
(in thousands)
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
$
177,184
$
147,731
$
20,152
$
68,735
$
(193,157) (a)
$
220,645
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Distributions from unconsolidated subsidiaries
Depreciation and amortization
Provision for bad debts
Equity in earnings of unconsolidated subsidiaries
Equity in earnings of consolidated subsidiaries
Loss on extinguishment of debt
Loss (gain) on sale of assets and businesses
Stock compensation expense
Amortization of debt discount, premium and issuance costs
Deferred income taxes
Changes in operating assets and liabilities, net of effects of business
combinations:
Accounts receivable
Other current assets
Other assets
Accounts payable
Accrued expenses
Net cash provided by operating activities
Investing activities
Business combinations, net of cash acquired
Purchases of property and equipment
Investment in businesses
Proceeds from sale of assets and businesses
Net cash provided by (used in) investing activities
Financing activities
Borrowings on revolving facilities
Payments on revolving facilities
Proceeds from term loans
Payments on term loans
Revolving facility debt issuance costs
Borrowings of other debt
Principal payments on other debt
Dividends paid to Holdings
Equity investment by Holdings
Intercompany
Decrease in overdrafts
Proceeds from issuance of non-controlling interests
Distributions to and purchases of non-controlling interests
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
—
7,540
—
—
(179,621)
6,527
(939)
18,291
7,895
14,041
—
(1,068)
168
1,450
(25,396)
26,072
—
(30,413)
—
45,788
15,375
970,000
(960,000)
1,139,487
(1,156,377)
(4,392)
25,630
(13,748)
(4,753)
2,017
(40,410)
(9,899)
—
—
(52,445)
(10,998)
11,071
19,940
76,408
1,067
(20,973)
(13,536)
—
(4,828)
—
—
(40,788)
(84,264)
4,459
(4,235)
2,271
2,919
86,171
(10,006)
(136,267)
(12,682)
15,022
(143,933)
—
—
—
—
—
—
(456)
—
—
66
14,118
—
(81)
—
—
(4,602)
—
—
156
(27,683)
(3,745)
3,413
1,091
12,493
15,378
(1,664)
(37,651)
—
19,537
(19,778)
—
—
—
—
—
18,224
(3,036)
—
—
56,742
(16,332)
—
—
(135)
56,151
(1,611)
6,467
4,856
$
—
9,982
(4,933)
3,905
(495)
5,056
4,561
—
61,945
66
—
—
—
20
993
3,235
(45,733)
(6,886)
1,951
(232)
(909)
27,325
110,510
(15,720)
(28,912)
—
3
(44,629)
—
—
—
(23,065)
—
2,767
(3,407)
—
—
—
—
—
(5,552)
(29,257)
36,624
76,435
$
113,059
$
—
—
—
—
193,157 (a)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,006
160,011
1,133
(21,054)
—
6,527
(10,349)
19,284
11,130
(72,324)
(118,833)
1,597
(886)
3,903
17,341
238,131
(27,390)
(233,243)
(12,682)
80,350
(192,965)
970,000
(960,000)
1,139,487
(1,179,442)
(4,392)
46,621
(20,647)
(4,753)
2,017
—
(9,899)
9,982
(10,620)
(21,646)
23,520
99,029
$
122,549
Cash and cash equivalents at end of period
$
73
$
_______________________________________________________________________________
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-53
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2016
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
(in thousands)
$
541
$
2,729,803
$
504,621
$
982,495
$
—
$
4,217,460
Net operating revenues
Costs and expenses:
Cost of services, exclusive of depreciation and amortization
2,037
2,362,781
460,301
840,256
General and administrative
Depreciation and amortization
Total costs and expenses
Income (loss) from operations
Other income and expense:
Intercompany interest and royalty fees
Intercompany management fees
Loss on early retirement of debt
Equity in earnings of unconsolidated subsidiaries
Non-operating gain
Interest income (expense)
Income (loss) before income taxes
Income tax expense (benefit)
Equity in earnings (losses) of consolidated subsidiaries
Net income (loss)
Less: Net income (loss) attributable to non-controlling
interests
106,864
5,348
63
68,329
114,249
2,431,173
(113,708)
298,630
31,083
168,915
(773)
—
33,932
(132,066)
(12,617)
(14,461)
113,567
115,411
(17,404)
(140,300)
—
19,838
8,719
315
169,798
54,557
(8,093)
—
10,917
471,218
33,403
(13,679)
(28,615)
—
105
—
(34)
(8,820)
2,656
—
—
60,717
900,973
81,522
—
—
(10,853)
—
—
(38,296)
32,373
12,712
107,148
(11,476)
19,661
(105,474)
—
(105,474) (a)
—
—
—
—
—
—
—
—
—
—
—
—
—
3,665,375
106,927
145,311
3,917,613
299,847
—
—
(11,626)
19,943
42,651
(170,081)
180,734
55,464
—
125,270
—
218
(2,536)
12,177
—
9,859
Net income (loss) attributable to Select Medical Corporation
$
115,411
$
106,930
$
(8,940)
$
7,484
$
(105,474)
$
115,411
_______________________________________________________________________________
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-54
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior
Notes (Continued)
Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2016
Loss (gain) on sale of assets and businesses
(33,738)
(12,975)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Distributions from unconsolidated subsidiaries
Depreciation and amortization
Provision for bad debts
Equity in earnings of unconsolidated subsidiaries
Equity in earnings of consolidated subsidiaries
Loss on extinguishment of debt
Gain on sale of equity investment
Impairment of equity investment
Stock compensation expense
Amortization of debt discount, premium and issuance costs
Deferred income taxes
Changes in operating assets and liabilities, net of effects of business
combinations:
Accounts receivable
Other current assets
Other assets
Accounts payable
Accrued expenses
Net cash provided by (used in) operating activities
Investing activities
Business combinations, net of cash acquired
Purchases of property and equipment
Investment in businesses
Proceeds from sale of assets and businesses
Proceeds from sale of equity investment
Net cash used in investing activities
Financing activities
Borrowings on revolving facilities
Payments on revolving facilities
Proceeds from term loans
Payments on term loans
Borrowings of other debt
Principal payments on other debt
Dividends paid to Holdings
Equity investment by Holdings
Intercompany
Increase in overdrafts
Proceeds from issuance of non-controlling interests
Distributions to and purchases of non-controlling interests
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Select
(Parent
Company
Only)
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Non-
Guarantor
Concentra
(in thousands)
Consolidating
and
Eliminating
Adjustments
Consolidated
Select
Medical
Corporation
$
115,411
$
107,148
$
(11,476)
$
19,661
$
(105,474) (a)
$
125,270
—
5,348
—
—
(113,567)
773
20,380
68,329
511
(19,838)
8,093
—
—
—
16,643
12,358
(709)
—
(1,432)
(2,978)
330
(1,287)
(2,848)
(406,305)
(15,262)
—
63,418
—
(2,779)
5,339
—
—
—
56,165
10,293
51,586
(24,679)
52,783
320,356
(59,520)
(101,864)
(4,723)
16,978
3,779
96
10,917
—
(105)
—
—
246
—
—
—
—
—
(30,045)
(4,602)
(53,295)
5,781
(1,110)
(83,593)
(953)
(28,561)
—
67
—
—
60,717
21
—
—
10,853
(21)
—
—
770
3,298
(11,882)
3,121
13,191
13,977
3,076
(4,094)
112,688
(5,428)
(15,946)
—
—
—
(358,149)
(145,350)
(29,447)
(21,374)
575,000
(650,000)
600,127
(230,524)
11,935
(15,144)
(2,929)
1,672
67,115
10,746
—
—
367,998
7,001
4,070
—
—
—
—
—
(751)
—
—
—
—
—
—
12,970
(2,554)
—
—
(169,163)
102,048
—
—
(2,331)
(172,245)
2,761
3,706
6,467
—
11,846
(6,839)
117,471
4,431
625
—
(5,000)
195,217
(207,510)
2,816
(2,952)
—
—
—
—
—
(3,484)
(20,913)
70,401
6,034
—
—
—
—
105,474 (a)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,476
145,311
532
(19,943)
—
11,626
(46,488)
(2,779)
5,339
17,413
15,656
(12,591)
29,241
17,450
9,290
(15,492)
46,292
346,603
(472,206)
(161,633)
(4,723)
80,463
3,779
(554,320)
575,000
(655,000)
795,344
(438,034)
27,721
(21,401)
(2,929)
1,672
—
10,746
11,846
(12,654)
292,311
84,594
14,435
99,029
$
Cash and cash equivalents at end of period
$
11,071
$
$
5,056
$
76,435
$
_______________________________________________________________________________
(a)
Elimination of equity in earnings of consolidated subsidiaries.
F-55
SELECT MEDICAL HOLDINGS CORPORATION
AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Selected Quarterly Financial Data (Unaudited)
The tables below sets forth selected unaudited financial data for each quarter of the last two years. The financial data presented
below is the same for both Select Medical Holdings Corporation and Select Medical Corporation, except for earnings per common
share which is limited to Select Medical Holdings Corporation.
Basic
Diluted
$
$
0.12
0.12
$
$
0.32
0.32
$
$
0.14
0.14
$
$
For the year ended December 31, 2017
Net operating revenues(1)
Income from operations
Net income
Net income attributable to Select Medical Holdings Corporation
Earnings per common share(2):
For the year ended December 31, 2018
Net operating revenues
Income from operations
Net income
Net income attributable to Select Medical Holdings Corporation
Earnings per common share(2):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share amounts)
$
1,091,517
$
1,102,465
$
1,077,014
$
1,094,249
91,765
23,463
15,870
115,663
51,300
42,055
72,098
24,824
18,462
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands, except per share amounts)
$
1,252,964
$
1,296,210
$
1,267,401
$
1,264,683
108,598
43,982
33,739
120,561
60,559
46,511
99,837
42,679
32,917
76,352
121,058
100,797
0.75
0.75
88,283
29,722
24,673
0.18
0.18
Basic
Diluted
$
$
0.25
0.25
$
$
0.35
0.35
$
$
0.24
0.24
$
$
_______________________________________________________________________________
(1)
Net operating revenues were retrospectively conformed to reflect the adoption of Topic 606, Revenue from Contracts
with Customers.
(2)
Due to rounding, the summation of quarterly earnings per common share balances may not equal year to date equivalents.
F-56
The following Financial Statement Schedule along with the report thereon of PricewaterhouseCoopers LLP dated
February 21, 2019, should be read in conjunction with the consolidated financial statements. Financial Statement Schedules not
included in this filing have been omitted because they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Select Medical Holdings Corporation
Select Medical Corporation
Schedule II—Valuation and Qualifying Accounts
Income Tax Valuation Allowance
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Balance at
Beginning
of Year
Charged to
Cost and
Expenses
Acquisitions(1)
Deductions(2)
(in thousands)
Balance at
End of Year
$
$
$
12,986
26,421
7,586
$
$
$
1,032
$
(13,435) $
3,875
$
— $
(118) $
18,975
$
— $
— $
(22) $
17,893
12,986
26,421
_______________________________________________________________________________
(1)
Includes valuation allowance reserves resulting from business combinations.
(2)
Valuation allowance deductions relate to the disposition of certain subsidiaries.
F-57
(This page has been left blank intentionally.)
Q U A L I T Y C A R E M A D E S T R O N G E R
T H R O U G H J O I N T V E N T U R E P A R T N E R S H I P S
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B O A R D O F D I R E C T O R S
Robert A. Ortenzio
Executive Chairman & Co-Founder
Select Medical Holdings Corporation
James S. Ely III
Founder & Chief Executive Officer
PriCap Advisors, LLC
Leopold Swergold
Managing Member
Anvers Management Company, LLC
Rocco A. Ortenzio
Vice Chairman & Co-Founder
Select Medical Holdings Corporation
Russell L. Carson
Founder
Welsh, Carson, Anderson & Stowe
William H. Frist
Former Majority Leader of
the United States Senate
Partner, Cressey & Company
Harold L. Paz, M.D.
Executive Vice President
& Chief Medical Officer
Aetna Inc.
Bryan C. Cressey
Founder & Partner
Cressey & Company
Thomas A. Scully
General Partner
Welsh, Carson, Anderson & Stowe
Marilyn B. Tavenner
Former Administrator of
Centers for Medicare &
Medicaid Services
E X E C U T I V E O F F I C E R S
Robert A. Ortenzio
Executive Chairman & Co-Founder
Martin F. Jackson
Executive Vice President
& Chief Financial Officer
Scott A. Romberger
Senior Vice President, Controller
& Chief Accounting Officer
Rocco A. Ortenzio
Vice Chairman & Co-Founder
John A. Saich
Executive Vice President
& Chief Administrative Officer
Robert G. Breighner, Jr.
Vice President, Compliance and Audit Services
& Corporate Compliance Officer
David S. Chernow
President & Chief Executive Officer
Michael E. Tarvin
Executive Vice President,
General Counsel & Secretary
C O R P O R A T E I N F O R M A T I O N
Corporate Headquarters
Select Medical Holdings Corporation
4714 Gettysburg Road
Mechanicsburg, PA 17055-5036
717.972.1100
Stockholder Inquiries
Joel T. Veit
Senior Vice President & Treasurer
4714 Gettysburg Road
Mechanicsburg, PA 17055-5036
717.972.1100 | ir@selectmedical.com
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
Penn National Insurance Plaza
2 N. 2nd Street, Suite 1100
Harrisburg, PA 17101
Stock Exchange
NYSE
Symbol: SEM
Internet Address
selectmedicalholdings.com
Register & Stock Transfer Agent
Stockholder correspondence
should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Overnight correspondence
should be mailed to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
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